Edward A. Robinson III and Diana R. Robinson v. Commissioner ( 2002 )

119 T.C. No. 4UNITED STATES TAX COURT
EDWARD A. ROBINSON III AND DIANA R. ROBINSON, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 9574-99. Filed September 5, 2002.
P-H operated a law practice as a sole proprietorship at
all relevant times. R audited Ps’ 1987 joint tax return and
made several adjustments to the Schedules A and C attached
to this tax return. Ps agreed to R’s adjustments and the
resulting deficiencies and additions to tax. In 1994, R
seized real property that Ps owned; in 1995, R sold the
property and applied the proceeds to Ps’ underpayment of
their 1987 income tax liability and interest thereon. On
Schedule C of their 1995 joint tax return, Ps deducted the
1987 underpayment interest that had been thus paid.
1. Held: Insofar as sec. 1.163-8T, Temporary Income Tax
Regs., 52 Fed. Reg. 24999 (July 2, 1987), and sec. 1.163-
9T(b)(2)(i)(A), Temporary Income Tax Regs., 52 Fed. Reg.
48409 (Dec. 22, 1987), apply under the circumstances herein
to characterize the 1987 underpayment interest thus paid in
1995 as not being “interest * * * on indebtedness properly
allocable to a trade or business” within the meaning of sec.
- 2 -
163(h)(2)(A), I.R.C. 1986, and therefore as not being
deductible under ch. 1, I.R.C. 1986, these regulations are
valid.
2. Held, further, Redlark v. Commissioner, 106 T.C. 31(1996), revd. and remanded 141 F.3d 936 (9th Cir. 1998),
will no longer be followed.
3. Held, further, Ps are not entitled to deduct the
interest they paid in 1995 on account of the underpayment of
their 1987 income tax liability.
Charles B. Sklar1, for petitioners.
Joseph Ineich, for respondent.
CHABOT, Judge: Respondent determined a deficiency in Federal
individual income tax for 1995 against petitioners in the amount
of $29,879.2 The issue for decision is whether petitioners may
deduct for 1995 the interest they paid in 1995 on their 1987
Federal individual income tax underpayment.3
1
Cheryl R. Frank and Gerald W. Kelly, Jr., appeared on
petitioners’ behalf at the trial. A few months later, before
filing any briefs, they moved for leave to withdraw as counsel;
the Court granted their motion. Later Charles B. Sklar entered
his appearance and thereafter represented petitioners on brief.
2
Of this total, $28,015 is income tax under ch. 1 and
$1,864 is self-employment tax under ch. 2.
Unless indicated otherwise, all section and chapter
references are to sections and chapters of the Internal Revenue
Code of 1986 as in effect for 1995. The section references in
table 1, infra, are to this Code as in effect for 1987.
3
Respondent disallowed petitioners’ $69,617 deduction of
(continued...)
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FINDINGS OF FACT
Some of the facts have been stipulated; the stipulations and
the stipulated exhibits are incorporated herein by this
reference.
Petitioners Edward A. Robinson III (hereinafter sometimes
referred to as Edward), and Diana R. Robinson resided in
Louisiana when they filed their petition in the instant case.
A. Edward’s Background
In 1970, Edward was graduated from Grambling State
University, cum laude, with a double major in political science
and English. In 1971, Edward received a master’s degree in
criminal jurisprudence from the State University of New York at
Albany. In 1975, Edward received his law degree from Rutgers
University. Edward also was awarded an honorary LL.D. from World
University, in Tucson, Arizona.
After his Rutgers graduation, Edward worked as the chief
administrator of the Louisiana Justice Department. Edward
3
(...continued)
“other interest” that was reported on the Schedule C (Profit or
Loss From Business) attached to their 1995 tax return. The
$69,617 interest payment was made in respect of petitioners’
underpayment of their 1987 Federal individual income tax
liability. The other adjustments that respondent made to
petitioners’ 1995 return were to petitioners’ Schedule A
(Itemized Deductions) and to the computation of the self-
employment tax deduction and the self-employment tax liability
for Edward A. Robinson III. These adjustments are computational;
their resolution depends on our determination of the issue for
decision.
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resigned from this position and opened his own law practice in
1979. Edward’s law practice focused almost exclusively on
personal injury cases. At all relevant times, Edward’s law
practice was operated as a sole proprietorship.
B. 1987 Return and Audit Thereof
During 1989, respondent audited petitioners’ 1986 and 1987
joint tax returns.4
On their 1987 tax return, petitioners reported $6,274
interest income and $60,677 net profit from Edward’s law
practice. On the 1987 Schedule C, petitioners reported $388,000
gross receipts, $18,500 cost of goods sold, and $308,823
deductions, leading to the $60,677 net profit. On the 1987 Form
1040, petitioners reported $3,866 chapter 1 income tax, $5,387
chapter 2 self-employment tax, $502 addition for underpayment of
estimated tax, and no withholding or other payments, for a total
of $9,755 owed. Petitioners timely paid this $9,755.
Respondent proposed adjustments to petitioners’ 1987 taxable
income, and a deficiency and additions to tax as shown in table
1.
4
We do not make further findings as to 1986 because the
parties have stipulated that the $69,617 item which is the basic
adjustment in the instant case is entirely interest on the
underpayment of petitioners’ 1987 tax liability.
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Table 1
Item Amount
Unreported income1 $25,377.81
Sched. C adjustments--net 195,715.95
Sched. A adjustment--
consequential2 6,389.00
Sched. A adjustments--other (658.59)
Deficiency 83,632.30
Addition--sec. 6653(a)(1)(A) 4,181.62
3
Addition--sec. 6653(a)(1)(B)
Addition--sec. 6661 20,908.08
1
All of the unreported income was from Edward’s law practice.
2
Reduction in medical expense deduction, resulting from increase
in adjusted gross income because of additional income from
Edward’s law practice.
3
Fifty percent of the interest on $83,632.30.
Petitioners agreed to these proposed changes, and the
appropriate amounts were assessed.
Respondent seized certain of petitioners’ property in 1994,
sold the property in 1995, and in 1995 applied $69,617 of the
proceeds to petitioners’ interest on the underpayment of their
1987 tax liability.
The $69,617 interest payment was not related to any
liability on petitioners’ 1987 tax return as originally filed, as
all such liability had been timely paid. This interest payment
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was applied only to interest assessed as a result of the 1987
audit deficiency in tax and additions. Petitioners deducted this
$69,617 as “Interest: * * * Other” on line 16b of the Schedule C
(Edward’s law practice) on their 1995 tax return.
On their 1995 tax return, petitioners reported $359,915 net
profit from Edward’s law practice (Sched. C), $1,410 royalty
income (Sched. E), and a $1,702 loss on sales of business
property (Form 4797). On the 1995 Schedule C, petitioners
reported $523,480 gross receipts, $26,340 cost of goods sold, and
$137,225 deductions (including the disputed $69,617 other
interest item), leading to the $359,915 net profit. On the 1995
Form 1040, petitioners reported $108,735 chapter 1 income tax,
$17,228 chapter 2 self-employment tax, $59 addition for
underpayment of estimated tax, and $110,000 estimated tax
payments, for a total of $16,022 owed.
________________________________
The $69,617 was interest paid in 1995, but it was not on
indebtedness properly allocable to Edward’s law practice,
petitioners’ only relevant trade or business.
OPINION
A. The Parties’ Contentions
The parties focus their dispute on whether section 163
prohibits allowance of petitioners’ claimed $69,617 Schedule C
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interest deduction; in particular whether the interest is “on
indebtedness properly allocable to a trade or business”, within
the meaning of section 163(h)(2)(A), and therefore exempt from
the general disallowance rule of section 163(h).
Petitioners contend that the $69,617 interest qualifies for
the exemption from the disallowance rule and that a regulation to
the contrary is invalid, relying on this Court’s opinions to that
effect. In the alternative, they contend that the regulation is
not an authoritative interpretation of the applicable statutory
language, the regulation having been issued before the statutory
language was enacted.
Respondent relies on the regulation as an authoritative
interpretation of an ambiguous statute and notes that the Courts
of Appeals of five different circuits have come to the same
conclusion. As to the prior opinions on which we relied in
invalidating the regulation, respondent’s brief states that “It
is therefore respondent’s position that pre-section 163(h) case
law is irrelevant to the resolution of the instant case.” In the
alternative, respondent contends that, if we were to conclude
“that deficiency interest attributable to a trade or business is
deductible, then an allocation of the deficiency interest in this
case to the Schedule C adjustments and to the Schedule A
adjustments for the 1987 year, will be required.”
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Neither side contends that we should distinguish between the
factual settings presented in our two prior opinions on this
subject. Apart from respondent’s alternative contention as to
the 1987 Schedule A adjustments, respondent apparently accepts
that, if the regulations are not valid, then the interest expense
resulting from the 1987 Schedule C adjustments is properly a 1995
Schedule C deduction.
B. Summary of Conclusions
We agree with respondent’s primary position and much of
respondent’s analysis.
Section 162(a) allows a deduction for “all the ordinary and
necessary expenses paid or incurred during the taxable year in
carrying on any trade or business”; this includes interest.
Section 163(a) allows a deduction for “all interest paid or
accrued within the taxable year on indebtedness”; this is allowed
even if the interest would not be deductible under section
162(a). Notwithstanding this broad allowance language there are
statutory limitations on amounts (e.g., sec. 163(d), relating to
investment interest) and prohibitions (e.g., sec. 163(f),
relating to registration-required obligations), that override not
only section 163, but all of chapter 1 (sec. 163(d)(1)) or even
“any other provision of law” (sec. 163(f)(1)).
In the instant case we focus on the prohibition in section
163(h)(1), prohibiting any deduction under chapter 1 for
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“personal interest”. The Congress has defined this term
comprehensively5 in section 163(h)(2), so we focus on the
specifics of the relevant part of the definition--“properly
allocable to a trade or business” (sec. 163(h)(2)(A))--rather
than concepts involved in “personal”.
Examination of the history of the legislation, both the
sequence of events and the formal explanations, does not lead to
any clear answer as to the meaning of the finally adopted
statutory language. It is clear, however, that the Congress
chose language different from the statutory language that had
been construed in earlier cases. This strongly suggests that the
Congress intended a meaning different from the older statutory
language, but it does not clearly indicate what the Congress
intended that difference to be.
It is in this setting that we reach the Treasury
Regulations--section 1.163-8T, Temporary Income Tax Regs., 52
Fed. Reg. 24999 (July 2, 1987), and section 1.163-9T(b)(2)(i)(A),
Temporary Income Tax Regs., 52 Fed. Reg. 48409 (Dec. 22, 1987).6
5
That is sec. 163(h)(2) provides that “the term ‘personal
interest’ means”. (Emphasis added.) Compare secs. 64 and 65
(“the term * * * includes” (emphasis added)).
6
Sec. 6232(a) of the Technical and Miscellaneous Revenue
Act of 1988 (TAMRA 1988), Pub. L. 100-647, 102 Stat. 3342, 3734-
3735, added subsection (e) to sec. 7805. Sec. 7805(e)(2)
provides that “Any temporary regulation shall expire within 3
years after the date of issuance of such regulation.” Sec.
7805(e)(2) applies to any temporary regulation issued after Nov.
(continued...)
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It is accepted that these regulations, if not invalid, would
result in our concluding that interest on petitioners’ 1987
underpayment of Federal income taxes is nondeductible personal
interest. We conclude that, taking into account the uncertainty
as to the meaning of the statute, even as informed by the history
of the legislation, these regulations constitute a permissible
interpretation of the statute. As a result, the regulations are
not invalid, and so petitioners’ claimed interest expense
deduction is not allowed under chapter 1.
C. Caselaw Setting of the Issues
We first addressed the validity of section 1.163-8T,
Temporary Income Tax Regs., 52 Fed. Reg. 24999 (July 2, 1987),
and section l.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., 52
Fed. Reg. 48409 (Dec. 22, 1987), in Redlark v. Commissioner, 106
T.C. 31, 34 (1996). At that time, the Court of Appeals for the
Eighth Circuit was the only Court of Appeals that had addressed
the issue, and it concluded that section 1.163-9T(b)(2)(i)(A),
Temporary Income Tax Regs., supra, is not invalid. Miller v.
United States, 65 F.3d 687, 691 (8th Cir. 1995). With all due
respect to the Court of Appeals for the Eighth Circuit, we
concluded in Redlark v. Commissioner, 106 T.C. at 42, 47, that
6
(...continued)
20, 1988. TAMRA 1988 sec. 6232(b), 102 Stat. at 3735. The
regulations herein involved were issued before Nov. 20, 1988, and
thus the “sunset” provision of sec. 7805(e)(2) does not apply to
these regulations.
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both section 1.163-8T, Temporary Income Tax Regs., supra, and
section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., supra,
as applied to the facts presented in Redlark were unreasonable.
Relying on Redlark v. Commissioner, supra, we held in Kikalos v.
Commissioner, T.C. Memo. 1998-92, that the interest on the income
tax deficiencies resulting from the operation of the taxpayer-
husband’s unincorporated trade or business was deductible under
section 163(h)(2)(A) because the interest was properly allocable
to the taxpayer-husband’s unincorporated trade or business.
The Courts of Appeals for the Ninth and Seventh Circuits
reversed our decisions in Redlark v. Commissioner, supra, and
Kikalos v. Commissioner, supra, respectively, and held that
section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., supra,
is a reasonable interpretation of section 163(h). Kikalos v.
Commissioner, 190 F.3d 791, 799 (7th Cir. 1999), revg. T.C. Memo.
1998-92; Redlark v. Commissioner, 141 F.3d 936, 942 (9th Cir.
1998), revg. and remanding 106 T.C. 31 (1996). The Courts of
Appeals for the Fourth and Sixth Circuits also reached the same
conclusion. McDonnell v. United States, 180 F.3d 721, 723 (6th
Cir. 1999); Allen v. United States, 173 F.3d 533, 538 (4th Cir.
1999).7
7
Although the Courts of Appeals for the Fourth and Seventh
Circuits noted the application of sec. 1.163-8T, Temporary Income
Tax Regs., 52 Fed. Reg. 24999 (July 2, 1987) (Allen v. United
States, 173 F.3d 533, 537 (4th Cir. 1999); Kikalos v.
(continued...)
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The Courts of Appeals uniformly relied on the following
rationale to support their conclusions that section 1.163-
9T(b)(2)(i)(A), Temporary Income Tax Regs., supra, is not
invalid: (1) The regulation is not inconsistent with either the
statute or its legislative history, and (2) the regulation is
supported by the Staff of the Joint Committee on Taxation,
General Explanation of the Tax Reform Act of 1986 (J. Comm. Print
1987), hereinafter referred to as the 1986 Blue Book. Kikalos v.
Commissioner, 190 F.3d at 798; McDonnell v. United States, 180
F.3d at 723 (adopting the rationale of Redlark v. Commissioner,
141 F.3d at 936); Allen v. United States, 173 F.3d at 537-538;
Redlark v. Commissioner, 141 F.3d at 941; Miller v. United
States, 65 F.3d at 690.
Although the judicial landscape surrounding section
163(h)(2)(A) has changed significantly since our decisions in
Redlark v. Commissioner, supra, and Kikalos v. Commissioner,
supra, the legislative landscape has not. Since section 1.163-
9T(b)(2)(i)(A), Temporary Income Tax Regs., supra, was published
in the Federal Register, Congress has not amended section
163(h)(2)(A) so as to compel a construction of section
163(h)(2)(A) contrary to the Secretary’s construction as embodied
7
(...continued)
Commissioner, 190 F.3d 791, 794 (7th Cir. 1999), revg. T.C. Memo.
1998-92), none of the cited Court of Appeals opinions
specifically discussed the validity of this regulation.
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in section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs.,
supra. The Courts of Appeals for the Fourth, Seventh, and Eighth
Circuits pointed to Congress’s failure to amend section
163(h)(2)(A) as additional evidence that the regulation is
reasonable. Kikalos v. Commissioner, 190 F.3d at 799 (7th Cir.);
Allen v. United States, 173 F.3d at 538 (4th Cir.); Miller v.
United States, 65 F.3d at 690 (8th Cir.).
We have considered the opinions of the Courts of Appeals for
the Fourth, Sixth, Seventh, Eighth, and Ninth Circuits; those
opinions are entitled to all due respect. Lardas v.
Commissioner, 99 T.C. 490, 494 (1992). Appeal in the instant
case, however, lies to the Court of Appeals for the Fifth Circuit
which has yet to address the issue presented herein.8
8
In Lardas v. Commissioner, 99 T.C. 490, 494-495 (1992),
we stated that, in Golsen v. Commissioner, 54 T.C. 742, 756-757
(1970), affd. 445 F.2d 985 (10th Cir. 1971), we
reasoned that, where a reversal would appear
inevitable, due to the clearly established position of
the Court of Appeals to which an appeal would lie, our
obligation as a national court does not require a
futile and wasteful insistence on our view.
* * * * * * *
It should be emphasized that the logic behind the
Golsen doctrine is not that we lack the authority to
render a decision inconsistent with any Court of
Appeals (including the one to which an appeal would
lie), but that it would be futile and wasteful to do so
where we would surely be reversed. Accordingly,
bearing in mind our obligation as a national court, see
Lawrence v. Commissioner, * * * [27 T.C. 713, 716-717
(continued...)
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Accordingly, we proceed to reconsider our opinions in
Redlark v. Commissioner, supra, and Kikalos v. Commissioner,
supra.
We set forth the pertinent provisions of section 163(h). We
then trace the history of the enactment of these provisions, from
Executive Branch proposals through the legislative process of the
Tax Reform Act of 1986 (H.R. 3838, the Ways and Means Committee’s
“clean bill”) and the retroactive amendments enacted in the
Technical and Miscellaneous Revenue Act of 1988 (TAMRA 1988). We
then evaluate the status of the regulations.
D. The Statute
Section 163(a) provides for the deductibility of all
interest paid or accrued in the taxable year on indebtedness.
The other subsections of section 163 provide limitations,
particularized rules, or definitions with regard to the allowance
8
(...continued)
(1957), revd. on other grounds 258 F.2d 562 (9th Cir.
1958),] we should be careful to apply the Golsen
doctrine only under circumstances where the holding of
the Court of Appeals is squarely on point. See Golsen
v. Commissioner, supra at 757.
Two District Courts in the Fifth Circuit have concluded that
section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., 52 Fed.
Reg. 48409 (Dec. 22, 1987), is not invalid. Fitzmaurice v.
United States, 87 AFTR 2d 2001-654, 2001-1 USTC par. 50,198 (S.D.
Tex. 2001); Davis v. United States, 71 F. Supp. 2d 622 (W.D. Tex.
1999). Although these opinions are relevant to the instant case,
they do not control because they are not Court of Appeals
opinions.
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rule of subsection (a). As applicable to 1995, the year before
us, section 163(h) provides, in pertinent part, as follows:
SEC. 163. INTEREST.
* * * * * * *
(h) Disallowance of Deduction for Personal Interest.--
(1) In general.–-In the case of a taxpayer other
than a corporation, no deduction shall be allowed under
this chapter [chapter 1, relating to normal taxes and
surtaxes] for personal interest paid or accrued during
the taxable year.
(2) Personal interest.–-For purposes of this
subsection, the term “personal interest” means any
interest allowable as a deduction under this chapter
other than–-
(A) interest paid or accrued on indebtedness
properly allocable to a trade or business (other
than the trade or business of performing
services as an employee),
(B) any investment interest (within the
meaning of subsection (d)),
(C) any interest which is taken into account
under section 469 in computing income or loss
from a passive activity of the taxpayer,
(D) any qualified residence interest within
the meaning of paragraph (3)), and
(E) any interest payable under section 6601
on any unpaid portion of the tax imposed by
section 2001 for the period during which an
extension of time for payment of such tax is in
effect under section 6163 or 6166 or under
section 6166A (as in effect before its repeal by
the Economic Recovery Tax Act of 1981).
Petitioners contend that the interest they paid in respect
of their 1987 income tax underpayment falls within the terms of
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section 163(h)(2)(A); they do not contend that their interest
payment falls within the terms of any of the other subparagraphs
of section 163(h)(2). Accordingly, we focus on section
163(h)(2)(A).
E. History of the Legislation (See Appendix infra.)
In November 1984, the Treasury Department issued a report to
the President recommending numerous revisions of the tax laws.
One of the proposals was designed to
curtail the subsidy implicit in the [then] current law
deduction of interest on debt to finance large amounts of
passive, tax-preferred, investment assets (such as corporate
stock) or extraordinary consumption expenditures (such as
second homes).
In May 1985, President Reagan issued a report which included
a proposal to subject “all interest not incurred in connection
with a trade or business” to the section 163(d) limitations on
investment interest.
The House bill followed the President’s proposal in that it
would impose a limit on deductibility of “nonbusiness interest”.
The latter term was defined to exclude “any interest which is
allowable as a deduction in computing adjusted gross income”.
The Ways and Means Committee report stated that “Interest expense
that is paid or incurred in carrying on a trade or business * * *
is not subject to the interest deduction limitation under the
bill.” H. Rept. 99-426 at 298, 1986-3 C.B. (Vol. 2) 1, 298.
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The Senate amendment separated out the investment interest
provisions (in a revised sec. 163(d)) and provided a prohibition
(new sec. 163(h)) on deducting “consumer interest”. The latter
term was defined to exclude “interest paid or accrued on
indebtedness incurred or continued in connection with * * * the
conduct of a trade or business”.
The conference committee reached its agreement on August 16,
1986. Thirteen days later, the staff of the Joint Committee on
Taxation published a summary of the agreement, hereinafter
sometimes referred to as the Joint Committee staff summary.
Twenty days after that, the conference committee published its
report. Thirty-four days after that, the Tax Reform Act of 1986
was enacted. The conference committee generally followed the
Senate’s approach, but changed the language to prohibit any
deduction for “personal interest”. For our purposes, “personal
interest” was defined the same way the Senate bill defined
“consumer interest”. The Joint Committee staff summary stated as
follows:
Interest on underpayments of tax (other than certain
deferred estate taxes) is treated as personal interest under
the provision.
The conference committee explanation includes the following
sentence:
Personal interest also generally includes interest on
tax deficiencies.
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On May 4, 1987, the staff of the Joint Committee on Taxation
published its “Blue Book”, which included the following:
Personal interest also includes interest on
underpayments of individual Federal, State or local
income taxes notwithstanding that all or a portion of
the income may have arisen in a trade or business.
* * *
On June 10, 1987, the chairman and ranking minority member
of each of the tax-writing committees introduced bills to make
technical corrections to TRA 1986. Each bill included the
following:
Subparagraph (A) of section 163(h)(2) of the 1986
Code is amended by striking out “incurred or continued
in connection with the conduct of” and inserting in
lieu thereof “properly allocable to”. [Sec. 105(c)(1)
of H.R. 2636 and S. 1350.]
Each bill provided that the change was to take effect as
though it had been included in TRA 1986. The Ways and Means
Committee report stated that the change in section 163(h)(2)(A)
is intended to make it consistent with the language of section
469, which also had been enacted in TRA 1986. The House of
Representatives passed the provision as part of the 1987 Budget
Reconciliation Act. The Finance Committee approved the same
language and described it the same way in its report.
For reasons unrelated to this provision, the technical
corrections were dropped from the Omnibus Budget Reconciliation
Act of 1987, Pub. L. 100-203, 101 Stat. 1330. The same
provisions were then introduced as part of the Technical
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Correction Act of 1988, with the same effective dates and
explanations, and ultimately enacted without change by the
Technical and Miscellaneous Revenue Act of 1988 (TAMRA 1988),
Pub. L. 100-647, 102 Stat. 3342.
The language thus enacted is what we must construe in the
instant case.
F. Analysis of the Statute
From the foregoing, we draw the following conclusions.
(1) Initial Objectives
Although the movement to enact what became section 163(h)
may have started with a concern about subsidizing already-tax-
favored investments and “extraordinary consumption expenditures
(such as second homes)” (infra Appendix 1. The Treasury Report),
the enacted statute is different--narrower in some respects and
broader in others--from the original announced objectives.
It is not at all unusual for the Congress to act outside the
confines of the problem described in the legislative history; the
Congress has done so in many different areas of the tax law.
See, e.g., Bartels Trust for Ben. of Univ. v. United States, 209
F.3d 147, 153-154 (2d Cir. 2000) (relating to charities’
unrelated trade or business income); Corn Belt Tel. Co. v. United
States, 633 F.2d 114, 117-118 (8th Cir. 1980) (relating to the
definition of “public utility property” for investment credit
purposes); Warrensburg Board & Paper Corp. v. Commissioner, 77
- 20 -
T.C. 1107, 1110-1111 (1981) (relating to subchapter S
corporations’ “one-shot” elections); Estate of Beal v.
Commissioner, 47 T.C. 269, 271-272 (1966) (relating to
includability of the value of certain annuities in decedents’
estates). Where the Congress has chosen to so legislate, the
courts do not confine the statute to the original problem, but
rather apply the statute to the net that the Congress has chosen
to cast.
In light of the evolution of section 163(h) over the 4 years
from the Treasury Report to TAMRA 1988, the original objective of
the proposal cannot be taken as sufficiently explaining the
meaning of section 163(h)(2)(A).
(2) The Varying “Handles”; Definition in the Statute
When the Congress enacts a definition of a term, the
statutory definition controls over definitions in general
dictionaries.
A review of the relevant history of the legislation reveals
the varying phraseology that the Congress employed in the
legislative process that culminated in the enactment of section
163(h)(2). Five different terms, or “handles”, were used to
describe the interest, the deductions in respect of which the
Congress wanted to either limit or disallow: “nonbusiness
interest”, “nonbusiness consumer interest”, “consumer interest”,
“personal (consumer) interest”, and “personal interest”. The
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Congress also used varying definitions for these terms, e.g.,
“Interest expense that is paid or incurred in carrying on a trade
or business” (H. Rept. 99-426 at 298, 1986-3 C.B. (Vol. 2) 1,
298), “interest paid or accrued on indebtedness incurred or
continued in connection with–-(i) the conduct of a trade or
business” (H.R. 3838, sec. 1421 (as passed by the Senate), 132
Cong. Rec. at S 8921 (June 26, 1986)).
We make these observations because of the apparent focus on
the question of whether interest paid in respect of an
individual’s Federal income tax liability is a “personal
obligation”. See Miller v. United States, 65 F.3d at 691,
stating:
that an individual’s income tax liability, regardless of the
nature of the income giving rise to the liability, is a
personal obligation and that, consequently, interest owed by
such individual because of a failure to pay his tax
obligation on time necessarily is also a personal
obligation.
See also Kikalos v. Commissioner, 190 F.3d at 797 (describing as
reasonable the view taken by the Secretary therein that interest
on income tax deficiencies is personal interest because the
obligation to pay income tax is personal); Allen v. United
States, 173 F.3d at 537 (stating: “Pursuant to these allocation
rules, deficiency interest is allocable to the payment of income
taxes, an expenditure that is purely personal in nature.”);
Redlark v. Commissioner, 141 F.3d at 941 (agreeing with the
statement of the Court of Appeals for the Eighth Circuit (Miller)
- 22 -
“that personal income tax obligations are always essentially
personal in nature”). Despite whatever logical conclusions may
flow from the Congress’s use of the term “personal interest”, and
the Congress’s clearly expressed intention to end the deduction
for indebtedness incurred to finance personal consumption
expenditures, the instant case does not turn on whether the
obligation to pay deficiency interest is a “personal obligation”
or whether the payment of Federal individual income tax is a
personal consumption expenditure. Indeed, the obligation to pay
home mortgage interest is undoubtedly a “personal obligation”,
yet that type of interest expense is excluded from the definition
of personal interest. Sec. 163(h)(2)(D). Moreover, as we noted
in Redlark v. Commissioner, 106 T.C. at 42: “To conclude that an
income tax deficiency is ipso facto a consumption expenditure
begs the issue.” Accordingly, the determination whether an item
of interest is either a “personal obligation” or a “personal
consumption expenditure” is not the talisman for purposes of
applying section 163(h). Rather, the controlling inquiry, as
framed by the statute itself, is whether the interest in issue is
“properly allocable to a trade or business”. Sec. 163(h)(2)(A).
When, as in the instant case, the Congress undertakes to
define a term explicitly, “we must follow that definition, even
if it varies from that term’s ordinary meaning.” Stenberg v.
Carhart, 530 U.S. 914, 942 (2000); Guerrero-Perez v. INS, 242
- 23 -
F.3d 727, 736-737 (7th Cir. 2001); see, e.g. Cherin v.
Commissioner, 89 T.C. 986 (1987). In other words, we are to
disregard the connotations of the term, or handle, that the
Congress adopts and instead focus on the language that the
Congress actually used to define the term. This is especially
true where, as in the instant case, the Congress tells us what
the term in question “means”. “As a rule, ‘a definition which
declares what a term ‘means’ . . . excludes any meaning that is
not stated.’” Colautti v. Franklin, 439 U.S. 379, 392-393 n.10
(1979). If, however, the statute in question uses the word
“includes” rather than “means” to define a term, then there is an
indication that the definition of the term is exemplary rather
than exclusive. Sec. 7701(c); see Winterrowd v. David Freedman
and Co., Inc., 724 F.2d 823, 825 (9th Cir. 1984)(citing Highway &
City Freight Drivers v. Gordon Transports, Inc., 576 F.2d 1285,
1289 (8th Cir. 1978)).
In Cherin v. Commissioner, 89 T.C. at 1000-1001, we
addressed, inter alia, whether the taxpayer’s deficiencies were
subject to a higher rate of interest under what was then (as to
interest accruing after Dec. 31, 1984) section 6621(c)9, dealing
with interest on a substantial underpayment attributable to a
“tax-motivated transaction”. We found as facts in Cherin v.
9
Sec. 6621(c) later was repealed by sec. 7721(b) of the
Omnibus Budget Reconciliation Act of 1989, Pub. L. 101-239, 103
Stat. 2106, 2399.
- 24 -
Commissioner, 89 T.C. at 987, 988, 991, that the taxpayer (1) was
looking for an investment which would produce significant income
for his retirement years, (2) reasonably relied on the advice of
his accountant, financial adviser, and attorney to enter into the
disputed transaction (a tax shelter involving cattle breeding),
and (3) contemplated that he would recover the purchase price of
the two herds in which he invested. Despite these findings which
suggested the presence of a profit motive, we concluded that the
taxpayer’s deficiencies were subject to the higher rate of
interest under section 6621(c), i.e., that the taxpayer had a
substantial underpayment attributable to a “tax-motivated
transaction”. Cherin v. Commissioner, 89 T.C. at 1001. We
reached our conclusion in Cherin even though the handle the
Congress chose, “tax-motivated transaction”, suggested the
importance of the taxpayer’s motives. Instead of focusing on the
connotations that logically flowed from that handle, we focused
on the relevant statutory language, which set forth what the term
“tax-motivated transaction” “means”. Sec. 6621(c)(3).
In the instant case, in restricting the allowance rule of
section 163(a), the Congress chose the term “personal interest”,
and the Congress told us what that term “means” in section
163(h)(2). As relevant herein, the term “personal interest”
means “any interest allowable as a deduction under this chapter
other than–-* * * interest paid or accrued on indebtedness
- 25 -
properly allocable to a trade or business (other than the trade
or business of performing services as an employee)”. Sec.
163(h)(2)(A). Based on this definition of “personal interest”
that the Congress set forth, the appropriate inquiry in the
instant case is not whether petitioners’ interest on their 1987
income tax deficiency is “personal” but whether it is “properly
allocable to a trade or business”.
(3) The Pre-TRA 1986 Cases
In Redlark v. Commissioner, 106 T.C. at 34-35, we opened our
discussion of the law as it stood before enactment of TRA 1986 as
follows:
The question remains, however, whether the elements giving
rise to the deficiencies to which the interest herein
relates are of such a nature as to permit such interest to
constitute a business expense within the meaning of section
162(a), and therefore of section 62(a), and, as a result, to
be characterized as interest “on indebtedness properly
allocable to a trade or business” within the meaning of
section 163(h)(2)(A)3 in the event that the temporary
regulation is not applicable. We think a review of the
cases decided prior to the enactment of section
163(h)(2)(A), in respect of the deductibility of interest on
income tax deficiencies as a business expense, will throw
light on this question and is therefore a significant
element in our analysis of the impact of that section on
petitioners’ claimed interest deduction. It is to that
review that we first turn our attention.
________________
3
Sec. 163(h)(2)(A) was amended by sec. 1005(c)(4) of the
Technical and Miscellaneous Revenue Act of 1988, Pub. L.
100-647, 102 Stat. 3342, 3390.
Sec. 163(h)(2)(A), as originally enacted in 1986,
provided:
- 26 -
(A) interest paid or accrued on indebtedness
incurred or continued in connection with the conduct of
a trade or business (other than the trade or business
of performing services as an employee), [Tax Reform Act
of 1986, Pub. L. 99-514, sec. 511(b), 100 Stat. 2085,
2246.]
The amended language, effective for the years in issue,
was intended to conform the definition of personal interest
to the language of the related passive loss and investment
interest limitation provisions, to permit consistent
application of a standard for allocation of interest. See
S. Rept. 100-445, at 36 (1988); H. Rept. 100-795, at 35
(1988). There is no indication that the change in language
was intended to make any substantive change in the meaning
of the statutory language.
We then analyzed three opinions: Standing v. Commissioner,
28 T.C. 789 (1957), affd. 259 F.2d 450 (4th Cir. 1958); Polk v.
Commissioner, 31 T.C. 412 (1958), affd. 276 F.2d 601 (10th Cir.
1960); Reise v. Commissioner, 35 T.C. 571 (1961), affd. 299 F.2d
380 (7th Cir. 1962). In each of these opinions we held that the
interest on a tax underpayment was an ordinary and necessary
expense “paid or incurred during the taxable year in carrying on
any trade or business” within the meaning of section 23(a)(1)(A),
I.R.C. 1939, the predecessor of section 162(a). In Standing v.
Commissioner, 28 T.C. at 789-795, we also held that the interest
on a tax underpayment was “attributable to” the taxpayer’s trade
or business within the meaning of section 22(n)(1), I.R.C. 1939,
the predecessor of section 62(a)(1), hence deductible in arriving
at adjusted gross income. In Polk v. Commissioner, 31 T.C. at
415, we noted that the net operating loss language in section
122(d)(5), I.R.C. 1939 (the predecessor of sec. 172(d)(4)), was
- 27 -
identical to the section 22(n)(1), I.R.C. 1939, language
construed in Standing and so should have the same meaning as in
Standing. In Reise v. Commissioner, 35 T.C. at 579-580, we noted
that neither Standing nor Polk discussed our earlier opinion in
Aaron v. Commissioner, 22 T.C. 1370 (1954), in which we had held
that interest on a tax underpayment was not attributable to the
taxpayer’s trade or business within the meaning of section
122(d)(5), I.R.C. 1939. In Reise we thereupon overruled Aaron
and reaffirmed the position we took in Polk that the interest on
the tax underpayment was attributable to the taxpayer’s trade or
business.
In Redlark v. Commissioner, 106 T.C. at 37, we then
summarized the effect of the foregoing cases as follows:
Concededly there is some confusion in the reasoning of
the decided cases, but the thrust of their bottomline
conclusions is clear. Exceptions will be accorded to the
“ordinary and necessary” provision of section 162 only when
there is explicit legislative indication that such a result
was intended. Thus, we agree with petitioners that there is
a consistent body of pre-section 163(h) case law holding
that, at least under limited circumstances such as were
involved in Standing v. Commissioner, supra, Polk v.
Commissioner, supra, and Reise v. Commissioner, supra,
deficiency interest is a deductible business expense under
section 162 and therefore under section 62(a)(1). See
Brennan & Megaard, “Deducting Interest on Noncorporate Trade
or Business Tax Deficiencies: Uncertainty Exists Under the
New Temporary Regulations”, 13 Rev. of Taxn. of Individuals
22 (1989).
Later in our opinion in Redlark v. Commissioner, 106 T.C. at
43, we pointed out that
- 28 -
we have consistently been reluctant to conclude that
Congress overruled existing case law when the statutory
language does not compel such a conclusion and Congress has
not otherwise expressly indicated that such a result should
ensue. * * *
As we noted, supra, in H.R. 3838 as reported by the Ways and
Means Committee, “nonbusiness interest” was defined to exclude
“any interest which is allowable as a deduction in computing
adjusted gross income”. Proposed amendment to sec. 163(d)(3)(B)
in sec. 402(a) of H.R. 3838 as reported by the Ways and Means
Committee. If that language had been enacted, then our Redlark
analysis of the statute would properly have led to the conclusion
that interest on a tax underpayment under the circumstances of
Redlark and the instant case would continue to be deductible
under section 162 and that section 163 would not affect that
deductibility, and that regulations to the contrary would be
contrary to the statute.
However, that language was not enacted. See infra,
Appendix. Instead, in TRA 1986 the Congress defined “personal
interest” to exclude “interest paid or accrued on indebtedness
incurred or continued in connection with the conduct of a trade
or business”. Sec. 163(h)(2)(A) (emphasis added). In TAMRA 1988
the Congress changed the language so as to exclude from personal
interest “interest paid or accrued on indebtedness properly
allocable to a trade or business.” Sec. 163(h)(2)(A) (emphasis
added). In Standing, Polk, and Reise, the critical statutory
- 29 -
language was “in carrying on any trade or business” (sec.
23(a)(1)(A), I.R.C. 1939) and “attributable to” the taxpayer’s
trade or business (secs. 22(n)(1) and 122(d)(5), I.R.C. 1939).
In Redlark v. Commissioner, 106 T.C. at 34, 37, we did not
deal with the fact that both the enacted TRA 1986 language (“in
connection with”) and the enacted TAMRA 1988 language (“properly
allocable to”) were different from the “in carrying on” and
“attributable to” language interpreted in the pre-TRA 1986
opinions.
Ordinarily, we would expect that a change in statutory
language indicates a change in meaning. Russello v. United
States, 464 U.S. 16, 23 (1983); cf. Elect. Arts, Inc. v.
Commissioner, 118 T.C. 226, 242-243 (2002), and cases there
cited.10
10
This is the general rule not only because of the
authority of the cited opinions, but also because this is the way
legislative drafters are instructed to draft statutes. See,
e.g., Office of the Legislative Counsel U.S. House of
Representatives, House Legislative Counsel’s Manual on Drafting
Style, 3 (1995), as follows:
(4) Use same word over and over.--If you have
found the right word, don’t be afraid to use it again
and again. In other words, don’t show your pedantry by
an ostentatious parade of synonyms. Your English
teacher may be disappointed, but the courts and others
who are straining to find your meaning will bless you.
(5) Avoid utraquistic subterfuges.--Do not use the
same word in 2 different ways in the same draft (unless
(continued...)
- 30 -
Application of this general rule (if the statutory language
is different, then it is presumed that the meaning is different)
to the matter before us leads to the conclusion that section
163(h)(2)(A) means something different from the statutory
provisions interpreted in the pre-TRA 1986 opinions.11
10
(...continued)
you give the reader clear warning).
To the same effect, see Dickerson, The Interpretation and
Application of Statutes 224 (1975), quoted in Zuanich v.
Commissioner, 77 T.C. 428, 443 n.26 (1981), as follows:
26
See R. Dickerson, The Interpretation and
Application of Statutes 224 (1975), as follows:
Because legal documents are for the most part
nonemotive, it is presumed that the author’s language
has been used, not for its artistic or emotional
effect, but for its ability to convey ideas.
Accordingly, it is presumed that the author has not
varied his terminology unless he has changed his
meaning, and has not changed his meaning unless he has
varied his terminology; that is, that he has committed
neither “elegant variation” nor “utraquistic
subterfuge”. This is the rebuttable presumption of
formal consistency. [Fn. refs. omitted.]
See also Hirsch, Drafting Federal Law, sec. 5.2 (3d ed. 1992).
11
This presumption is rebuttable. In the TAMRA 1988
amendments, at every step in the enactment of the change from
“incurred or continued in connection with the conduct of” to
“properly allocable to” the Congress stated the intention that
this was done to effectuate more clearly the original intention
of TRA 1986 and not to change the meaning of the statute. See
infra, Appendix. Consistent with these statements of
congressional intent, the TAMRA 1988 amendments took “effect as
if included in the provision of” the TRA 1986 to which the TAMRA
1988 amendments relate. See also Redlark v. Commissioner, 106
T.C. at 34 n.3. However, the parties have not directed our
attention to, and we have not found, any evidence that either the
(continued...)
- 31 -
We do not intend in the instant case to overrule any of the
three pre-TRA 1986 opinions--Standing, Polk, or Reise. The
statutory terms construed in those cases have been carried
forward from the Internal Revenue Code of 1939 and now appear in
section 162(a) (“paid or incurred * * * in carrying on any trade
or business”), section 62(a)(1) (“attributable to a trade or
business carried on by the taxpayer”), and section 172(d)(4)
(“attributable to a taxpayer’s trade or business”).
However, the result of the Congress’s decisions (1) to use
different language in section 163(h)(2)(A) and (2) to provide in
section 163(h)(1) that the disallowance rule overrode everything
else in chapter 1, is that, as to the issue we cited them for in
Redlark, the pre-TRA 1986 opinions have become irrelevant to the
determination of chapter 1 tax liabilities.
(4) The Conference Report, The 1986 Blue Book
In Redlark v. Commissioner, 106 T.C. at 42-45, we discussed
the following sentence from the TRA 1986 conference committee
explanation--
Personal interest also generally includes interest on
tax deficiencies
--with special focus on “generally” and “tax deficiencies”. We
noted that “deficiency” is a term of art with a settled
11
(...continued)
enacted TRA 1986 language or the enacted TAMRA 1988 language was
intended to have the same meaning as the language interpreted in
the pre-TRA 1986 opinions.
- 32 -
definition. We interpreted the conference committee sentence as
follows (106 T.C. at 44-45):
In short, we think that when the conference committee
used the phrase “tax deficiencies”, it was referring to
amounts due by way of income, estate, and gift taxes. In
this context, the word “generally” in the conference
committee report takes on a significant meaning. It signals
that not all interest relating to income tax, etc.,
deficiencies are included in “personal interest”. The
logical explanation for what is excluded by “generally” is
such interest that constitutes an ordinary and necessary
business expense and is therefore “allocable to an
indebtedness of a trade or business” within the meaning of
the exception clause of section 163(h)(2)(A). To adopt
respondent’s position would require us to substitute the
word “always” for “generally” and to expand the
interpretation of the word “deficiencies” beyond its
accepted meaning to encompass taxes other than income, etc.,
taxes in order to account for the use of the word
“generally”. By way of contrast, our interpretation accepts
the established meaning of “deficiencies” and gives effect
to “generally” without modification.
We then discussed the 1986 Blue Book’s status and concluded
as follows (106 T.C. at 45-46):
Where there is no corroboration in the actual legislative
history, we shall not hesitate to disregard the General
Explanation as far as congressional intent is concerned.7
See Estate of Wallace v. Commissioner, 965 F.2d 1038, 1050-
1051 n.15 (11th Cir. 1992), affg. 95 T.C. 525 (1990);
Zinniel v. Commissioner, 89 T.C. 357, 367 (1987), affd. 883
F.2d 1350 (7th Cir. 1989);8 see also Livingston, supra at 93
(“The Blue Book is on especially weak ground when it adopts
anti-taxpayer positions not taken in the committee
reports.”). Given the clear thrust of the conference
committee report, the General Explanation is without
foundation and must fall by the wayside. To conclude other-
wise would elevate it to a status and accord it a deference
to which it is simply not entitled.
__________________
7
In this connection, we also note that the Tax Reform Act
of 1986, Pub. L. 99-514, 100 Stat. 2085, was enacted on Oct.
22, 1986, during the 99th Congress, whereas the General
- 33 -
Explanation was published on May 4, 1987, during the 100th
Congress. Thus, the General Explanation is not even
entitled to the respect it might otherwise be accorded if it
had been prepared for the Congress which enacted sec.
163(h).
8
See also Lawson v. Commissioner, T.C. Memo. 1994-286.
We conclude that there are several difficulties with the
foregoing analysis in our opinion in Redlark v. Commissioner, 106
T.C. at 44-46. For the following reasons, we would not agree
that the conference committee explanation has a “clear thrust”.
Firstly, interest ordinarily is imposed on underpayments or
overpayments, not on deficiencies. See, e.g., secs. 6601, 6611,
6621. There can be an income tax deficiency without an
underpayment.12 There can be an underpayment without an income
tax deficiency.13 In describing the amendments made by TRA 1986
sections 1511 (to sec. 6621, I.R.C. 1986) and 1512 (to sec. 6601,
I.R.C. 1986), the Joint Statement of Managers portion of the
conference committee report consistently refers to interest on
underpayments or overpayments of tax, and it does not refer to
interest on tax deficiencies. H. Conf. Rept. 99-841, at II-784
to II-785 (1986); 1986-3 C.B. (Vol. 4) at 784-785.
12
See, e.g., Lundy v. Commissioner, T.C. Memo. 1993-278,
revd. 45 F.3d 856 (4th Cir. 1995), revd. 516 U.S. 235 (1996), in
which the parties agreed that the taxpayer had a $778 deficiency
even though the taxpayer’s withheld (and not refunded) income
taxes exceeded his total tax liability.
13
E.g., when a correct tax return is filed, but the
payments are less than the correctly stated liabilities.
- 34 -
Thus, it is not clear whether the term “deficiency”, to
which we attributed such significance in Redlark v. Commissioner,
106 T.C. at 44-45, is merely an inadvertence in one portion of
the conference committee report.
Secondly, the word “generally” may merely serve the function
of alerting the reader that there is a category of interest on
tax underpayments that does not fit into the definition of
“personal interest”--to wit, the interest described in
subparagraph (E) of section 163(h)(2), as follows:
(E) any interest payable under section 6601 on any
unpaid portion of the tax imposed by section 2001 for the
period during which an extension of time for payment of such
tax is in effect under section 6163 or 6166.[14] [Joint
Committee staff summary at 18.]
Thirdly, the Joint Committee staff summary, published 20
days before the Conference Report, described the provision as
follows:
Interest on underpayments of tax (other than certain
deferred estate taxes) is treated as personal interest
under the provision.
Apart from the use of “underpayments” rather than “deficiencies”,
the Joint Committee staff summary appears to be completely
consistent with the conference committee sentence on which we
focused in Redlark v. Commissioner, 106 T.C. at 44-45--and quite
inconsistent with the conclusion we drew in Redlark.
14
The reference to sec. 6166 later was stricken by sec.
503(b)(2)(B) of the Taxpayer Relief Act of 1997, Pub. L. 105-34,
111 Stat. 788.
- 35 -
Fourthly, even if we were to agree that the use of
“deficiencies” in the conference committee sentence is
significant, the only significance stated in Redlark v.
Commissioner, 106 T.C. at 44, is that it refers to “amounts due
by way of income, estate, and gift taxes.”15 As we noted supra
in Secondly and Thirdly, the exclusion provided by subparagraph
(E) of section 163(h)(2) is an exclusion of interest on estate
tax in certain circumstances. This is a far simpler explanation
of the conference committee sentence than the labored explanation
in Redlark; it provides consistency of meaning among the various
documents in the history of the legislation; and it refutes the
conclusion in Redlark v. Commissioner, 106 T.C. at 46, that the
conference committee sentence has a “clear thrust” that requires
us to reject the TRA 1986 Blue Book and to invalidate Treasury
Regulations. Of course, if a Blue Book were to conflict with
enacted language or controlling legislative history, then the
statutory language or the controlling legislative history would
prevail. In our view, the conference committee report is not
clear regarding which category of interest was intended to be
excepted from “personal interest”; i.e., which category made it
15
Beginning with the Tax Reform Act of 1969, Pub. L. 91-
172, 83 Stat. 487, the Congress began to bring a series of
regulatory excise taxes into the definition of “deficiency” in
sec. 6211. At the time TRA 1986 was enacted, the definition
included the taxes imposed by chs. 41 through 45, in addition to
the income, estate, and gift taxes imposed by subtits. A and B.
- 36 -
necessary to qualify the statement about personal interest with
“generally”. The Blue Book identifies another possible category
besides interest on a deficiency arising in the case of a sole
proprietorship, which contributes to the conclusion that the
controlling legislative history’s meaning is unclear.
(5) Conclusions From the Statute and the History of the
Legislation
The relevant statutory language is not the term “personal
interest”, but the definitional term in subparagraph (A) of
section 163(h)(2), in the context of the remaining elements of
the definition. That definitional term differs from the
statutory language construed in the three pre-TRA 1986 opinions
relied on in Redlark, and so the meaning of that definitional
term presumably is different from the meanings of the statutory
language construed in those three opinions.
The relevant statutory language does not provide a clear
answer to the dispute before us in the instant case.
The history of the legislation clearly shows an evolution in
the Congress’s thinking during the legislative process; it
provides some support for the validity of the Treasury
regulations, but that support is rebuttable. Apart from the
analysis in Redlark, that history does not provide support for
the conclusion that the Treasury regulations are invalid.
- 37 -
In this relatively inconclusive setting, we proceed to
examine the Treasury regulations.
G. The Regulations
In the instant case, we consider the validity of the
following regulations: (1) section 1.163-8T(c) and (c)(3)(ii),
Temporary Income Tax Regs.,16 52 Fed. Reg. 24999 (July 2, 1987),
16
Sec. 1.163-8T(c)(1) and (c)(3)(ii), Temporary Income Tax
Regs., supra, provides in pertinent part as follows:
Sec. 1.163-8T Allocation of interest expense among
expenditures (temporary).
(a) In General--(1) Application. This section
prescribes rules for allocating interest expense for
purposes of applying sections 469 (the “passive loss
limitation”) and 163(d) and (h) (the “nonbusiness interest
limitations”).
* * * * * * *
(c) Allocation of debt and interest expense–-(1)
Allocation in accordance with use of proceeds. Debt is
allocated to expenditures in accordance with the use of the
debt proceeds and, * * *. * * * debt proceeds and related
interest expense are allocated solely by reference to the
use of such proceeds, and the allocation is not affected by
the use of an interest in any property to secure the
repayment of such debt or interest. * * *
* * * * * * *
(3) Allocation of debt; proceeds not disbursed to
borrower--* * *
* * * * * * *
(ii) Debt assumptions not involving cash disbursements.
If a taxpayer incurs or assumes a debt in consideration for
the sale or use of property, for services, or for any other
purpose, or takes property subject to a debt, and no debt
(continued...)
- 38 -
and (2) section 1.163-9T(b)(2)(i)(A), Temporary Income Tax
Regs.,17 52 Fed. Reg. 48409 (Dec. 22, 1987). See Redlark v.
16
(...continued)
proceeds are disbursed to the taxpayer, the debt is treated
for purposes of this section as if the taxpayer used an
amount of the debt proceeds equal to the balance of the debt
outstanding at such time to make an expenditure for such
property, services, or other purpose.
17
Sec. 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs.,
supra, provides as follows:
Sec. 1.163-9T Personal interest (temporary).
* * * * * * *
(b) Personal interest–-
* * * * * * *
(2) Interest relating to taxes–-(i) In general. Except
as provided in paragraph (b)(2)(iii) of this section,
personal interest includes interest–-
(A) Paid on underpayments of individual Federal, State
or local income taxes and on indebtedness used to pay such
taxes (within the meaning of sec. 1.168-8T), regardless of
the source of the income generating the tax liability.
* * * * * * *
(ii) Example.
A, an individual, owns stock of an S corporation. On
its return for 1987, the corporation underreports its
taxable income. Consequently, A underreports A’s share of
that income on A’s tax return. In 1989, A pays the
resulting deficiency plus interest to the Internal Revenue
Service. The interest paid by A in 1989 on the tax
deficiency is personal interest, notwithstanding the fact
that the additional tax liability may have arisen out of
income from a trade or business. The result would be the
same if A’s business had been operated as a sole
proprietorship.
(continued...)
- 39 -
Commissioner, 106 T.C. at 40-42; see also supra note 6 (regarding
the continuing vitality of these temporary regulations, notwith-
standing section 7805(e)(2)).
(1) Standards for Judging Validity of Regulations
Section 1.163-8T, Temporary Income Tax Regs., supra, was
promulgated under the authority of sections 469(l)(4)18 and 7805,
the basic regulation-prescribing authority for the Treasury
Department. T.D. 8145, 1987-2 C.B. 47, 50. In the relevant
Notice of Proposed Rulemaking, the Commissioner concluded that
section 1.163-8T, Temporary Income Tax Regs., supra, is an
interpretative regulation. 52 Fed. Reg. 25036 (July 2, 1987);
1987-2 C.B. 1053. For purposes of the instant case, we agree
with the Commissioner’s conclusion and treat section 1.163-8T,
Temporary Income Tax Regs., supra, as an interpretative
regulation because the legislative delegation to the Secretary to
17
(...continued)
Given the interaction between secs. 1.163-8T and 1.163-9T,
Temporary Income Tax Regs., supra, and the fact that there is no
sec. 1.168-8T, Temporary Income Tax Regs., it appears that the
reference to sec. 1.168-8T, Temporary Income Tax Regs., supra, in
sec. 1.163-9T(b)(2)(i)(A), supra, should be to sec. 1.163-8T,
Temporary Income Tax Regs., supra, instead. See sec. 1.163-
9T(b)(3), Temporary Income Tax Regs., supra (cross-referencing
sec. 1.163-8T, Temporary Income Tax Regs., supra, for rules
determining the allocation of interest expense to various
activities).
18
Treasury Decision 8145 refers to sec. 469(k)(4). T.D.
8145, 1987-2 C.B. 47, 50. That provision was redesignated as
sec. 469(l)(4). See Appendix note 1. For convenience, we refer
to this provision as sec. 469(l)(4).
- 40 -
prescribe regulations relates to section 469 only. Sec.
469(l)(4); Hughes Intl. Sales Corp. v. Commissioner, 100 T.C.
293, 303-304 (1993).
Section 1.163-9T, Temporary Income Tax Regs., supra, was
promulgated under section 7805. T.D. 8168, 1988-1 C.B. 80, 83.
In the relevant Notice of Proposed Rulemaking, 1988-1 C.B. 926,
927, the Commissioner concluded that section 1.163-9T, Temporary
Income Tax Regs., supra, is an interpretative regulation. For
purposes of the instant case, we agree with the Commissioner’s
conclusion and treat section 1.163-9T, Temporary Income Tax
Regs., supra, as an interpretative regulation.
Although interpretative regulations are entitled to
considerable weight, they are accorded less deference than
legislative regulations, which are issued under a specific grant
of authority to address a matter raised by the relevant statute.
Chevron U.S.A. v. Natural Res. Def. Council, 467 U.S. 837, 843-
844 (1984); United States v. Vogel Fertilizer Co., 455 U.S. 16,
24 (1982). Temporary regulations are accorded the same weight as
final regulations. Peterson Marital Trust v. Commissioner, 102
T.C. 790, 797 (1994), affd. 78 F.3d 795 (2d Cir. 1996).
An interpretative regulation is to be upheld if it
“‘implement[s] the congressional mandate in some reasonable
manner.’” United States v. Vogel Fertilizer Co., 455 U.S. at 24(quoting United States v. Correll, 389 U.S. 299, 307 (1967)). In
- 41 -
making this determination, we employ the following analysis set
forth by the Supreme Court:
Under the formulation now familiar, when we confront an
expert administrator’s statutory exposition, we inquire
first whether “the intent of Congress is clear” as to
“the precise question at issue.” Chevron U.S.A. Inc.
v. Natural Resources Defense Council, Inc., 467 U.S.
837, 842 (1984). If so, “that is the end of the
matter.” Ibid. But “if the statute is silent or
ambiguous with respect to the specific issue, the
question for the court is whether the agency’s answer
is based on a permissible construction of the statute.”
Id., at 843. If the administrator’s reading fills a
gap or defines a term in a way that is reasonable in
light of the legislature’s revealed design, we give the
administrator’s judgment “controlling weight.” Id., at
844. [NationsBank of N.C., N.A. v. Variable Annuity
Life Ins. Co., 513 U.S. 251, 257 (1995).]
Accordingly, we must first consider the statute and determine
whether section 163(h)(2)(A) is silent or ambiguous with respect
to the issue before us. If we conclude that it is, then we must
consider the Secretary’s regulatory interpretation of section
163(h)(2)(A) on this issue and determine whether that
interpretation represents a permissible construction of the
statute. We address each of these considerations in turn.
(2) Silence or Ambiguity
As set forth supra, the relevant inquiry in the instant case
is whether petitioners’ interest on their 1987 income tax
underpayment is “properly allocable to a trade or business”.
We have concluded (supra F (5) Conclusions From the Statute
and the History of the Legislation) that the statutory text does
not on its face provide the answer to the question before us. By
- 42 -
choosing to use a definition different from the statutory phrases
we had earlier construed, the Congress apparently intended a
meaning different from the meaning of those earlier statutory
phrases, but the statutory text does not reveal specifically what
that difference is. The history of the legislation provides some
support for a specific answer, but that support is rebuttable.
Every Court of Appeals which has addressed the issue
presented herein has reached the same conclusion that the statute
is silent or ambiguous. Kikalos v. Commissioner, 190 F.3d at
797; McDonnell v. United States, 180 F.3d at 723; Allen v. United
States, 173 F.3d at 536 (describing the term “properly allocable”
as “manifestly ambiguous”); Redlark v. Commissioner, 141 F.3d at
940 (describing as “untenable” the “assertion that the words,
‘properly allocable’, unambiguously specify that interest on
business-related personal income tax deficiencies should be
deductible”); Miller v. United States, 65 F.3d at 690 (describing
Congress’s failure to “define what constitutes business interest”
as “an implicit legislative delegation of authority to the
Commissioner to clarify whether income tax deficiency interest is
‘properly allocable to a trade or business.’”); see also Tedori
v. United States, 211 F.3d 488, 493 (9th Cir. 2000) (stating
“‘the common and ordinary meaning’ of the statutory phrase
‘properly allocable to a trade or business’ is not at all
plain”).
- 43 -
We conclude that section 163(h)(2)(A) is silent or
ambiguous. We now proceed to the second prong of our analysis;
i.e., whether the regulations in issue are based on permissible
constructions of section 163(h)(2)(A).
(3) Permissible Construction
To be valid, a regulation need not be the only, or even the
best, construction of the statute it purports to implement.
Atlantic Mut. Ins. Co. v. Commissioner, 523 U.S. 382, 389 (1998);
see Romann v. Commissioner, 111 T.C. 273, 282 (1998). The
Supreme Court has stated that a reviewing court--
need not conclude that the agency construction was the
only one it permissibly could have adopted to uphold
the construction, or even the reading the court would
have reached if the question initially had arisen in a
judicial proceeding. [Chevron U.S.A. v. Natural Res.
Def. Council, 467 U.S. at 843 n.11.]
Rather, the reviewing court need only conclude that the
regulation is reasonable. Cottage Savings Assn. v. Commissioner,
499 U.S. 554, 560-561 (1991)(citing National Muffler Dealers
Assn. v. United States, 440 U.S. 472, 476-477 (1979)). A
regulation is reasonable if it harmonizes with the plain
language, origin, and purpose of the statute it purports to
implement. United States v. Vogel Fertilizer Co., 455 U.S. at
25-26; National Muffler Dealers Assn. v. United States, 440 U.S.
at 477.
(a) Section 1.163-8T, Temporary Income Tax Regs., 52
Fed. Reg. 24999 (July 2, 1987).
Section 1.163-8T, Temporary Income Tax Regs., supra,
provides the rules for the allocation of interest expense for
- 44 -
purposes of sections 163(d), 163(h), and 469. Sec. 1.163-
8T(a)(1), Temporary Income Tax Regs., supra. Although the
Congress did not itself devise the allocation rules, the Congress
clearly stated how it expected the allocation rules to operate.
The Joint Statement of Managers portion of the conference
committee report dealing with section 469 states, in pertinent
part, as follows (H. Conf. Rept. 99-841 at II-146 (1986), 1986-3
C.B. (Vol. 4) at 146):
Expenses allocable to portfolio income.--The conference
agreement provides that portfolio income is reduced by the
deductible expenses (other than interest) that are clearly
and directly allocable to such income. Properly allocable
interest expense also reduces portfolio income. Such
deductions accordingly are not treated as attributable to a
passive activity.
The conferees anticipate that the Treasury will issue
regulations setting forth standards for appropriate
allocation of expenses and interest under the passive loss
rule. The conferees anticipate that regulations providing
guidance to taxpayers with respect to interest allocation
will be issued by December 31, 1986. These regulations
should be consistent with the purpose of the passive loss
rules to prevent sheltering of income from personal services
and portfolio income with passive losses. Moreover, the
regulations should attempt to avoid inconsistent allocation
of interest deductions under different Code provisions.4
In the case of entities, a proper method of
allocation may include, for example, allocation of
interest to portfolio income on the basis of assets,
although there may be situations in which tracing is
appropriate because of the integrated nature of the
transactions involved. Because of the difficulty of
recordkeeping that would be required were interest
expense of individuals allocated rather than traced, it
is anticipated that, in the case of individuals,
interest expense generally will be traced to the asset
or activity which is purchased or carried by incurring
or continuing the underlying indebtedness.
- 45 -
________________
4
For example, an interest deduction that is disallowed
under section 265 or 291 should not be allowed, capitalized,
or suspended under another provision.
The Congress’s suggestion, however, specifically related to
the allocation rules for section 469 only; the Joint Statement of
Managers portion of the conference committee report does not
provide a similar prescription for allocating interest expense
for purposes of subsections (d) and (h) of section 163. In TAMRA
1988, the Congress amended subsections (d) and (h) of section 163
to conform the relevant language thereof to the relevant language
of section 469 in order to achieve “consistent application of a
standard for allocation of interest” among the “related
provisions” of sections 163(d), 163(h), and 469. By conforming
the language of subsections (d) and (h) to section 163 to the
relevant language of section 469, the Congress gave a clear
indication that the tracing regime it contemplated for purposes
of section 469 is the allocation method that it also intended for
subsections (d) and (h) of section 163. See Appendix pp. 73-74.
An examination of section 1.163-8T, Temporary Income Tax
Regs., supra, shows that the Secretary heeded the Congress’s
suggestion. Section 1.163-8T, Temporary Income Tax Regs., supra,
imposes the very tracing regime that the Congress contemplated.
Sec. 1.163-8T(a)(3), Temporary Income Tax Regs., supra.
In sum, the Congress suggested the means by which to
allocate interest expense for purposes of section 469; the
- 46 -
Secretary followed that suggestion; and the Congress later
amended the relevant language of sections 163(d) and 163(h) to
conform to the relevant language of section 469. In light of
these circumstances, we conclude that the tracing regime that
section 1.163-8T, Temporary Income Tax Regs., supra, imposes is a
permissible construction of section 163(h)(2)(A).
In addition to providing rules for the allocation of
interest expense, section 1.163-8T, Temporary Income Tax Regs.,
supra, also provides rules for the treatment of interest expense
so allocated. Section 1.163-8T(a)(4)(A), Temporary Income Tax
Regs., supra, provides that “Interest expense allocated to a
trade or business expenditure (as defined in paragraph (b)(7) of
this section) is taken into account under section 163(h)(2)(A)”.
Section 163(h)(2)(A) is the provision that petitioners contend
applies to their payment of interest on their 1987 Federal
individual income tax deficiency. Section 1.163-8T(b)(7),
Temporary Income Tax Regs., supra, defines the term “trade or
business expenditure” to mean “an expenditure (other than a
passive activity expenditure or an investment expenditure) in
connection with the conduct of any trade or business other than
the trade or business of performing services as an employee.” If
an expenditure “is not a trade or business expenditure, a passive
activity expenditure, or an investment expenditure”, then section
1.163-8T(a)(4)(D), Temporary Income Tax Regs., supra, treats the
- 47 -
expenditure as personal interest for purposes of section 163(h).
Sec. 1.163-8T(b)(5), Temporary Income Tax Regs., supra.
As previously noted, section 1.163-8T(c)(3)(ii), Temporary
Income Tax Regs., 52 Fed. Reg. 25001 (July 2, 1987), allocates
petitioners’ payment of interest on their 1987 Federal individual
income tax underpayment to the satisfaction thereof. The
treatment of petitioners’ interest payment thus depends on
whether the payment of one’s Federal individual income tax
liability is an expenditure that is “in connection with the
conduct of any trade or business”. While reasonable arguments
may lie on either side of this issue, the Secretary has
undertaken to resolve it in promulgating section 1.163-9T(b)(2),
Temporary Income Tax Regs., 52 Fed. Reg. 48409 (Dec. 22, 1987),
and it is our charge not to resolve that issue ourselves, but
rather to determine “whether there is any reasonable basis for
the resolution embodied in the Commissioner's Regulation.”
Fulman v. United States, 434 U.S. 528, 536 (1978); see also CSX
Corp. v. Commissioner, 89 T.C. 134, 153 (1987). We now turn our
attention to that task.
(b) Section 1.163-9T(b)(2)(i)(A), Temporary Income Tax
Regs., 52 Fed. Reg. 48409 (Dec. 22, 1987)
As applied to the instant case, section 1.163-
9T(b)(2)(i)(A), Temporary Income Tax Regs., supra, treats
petitioners’ payment of interest on their 1987 income tax
underpayment as nondeductible “personal interest”. The text of
- 48 -
section 163(h)(2)(A) does not compel this result. The relevant
legislative history, however, lends some support to this
interpretation of the statute.
The Joint Committee staff summary, which we did not consider
in Redlark v. Commissioner, supra, provides, in pertinent part,
as follows: “Interest on underpayments of tax (other than certain
deferred estate taxes) is treated as personal interest under the
provision [sec. 163(h)].” Joint Committee staff summary at 18.
Under this view, interest on underpayments of “certain deferred
estate taxes” is the only type of interest on underpayments of
tax that is excluded from the definition of personal interest.
This view supports section 1.163-9T(b)(2)(i)(A), Temporary Income
Tax Regs., supra, which includes interest paid on underpayments
of Federal income taxes within the definition of personal
interest.
We acknowledge that the Joint Committee staff summary is not
the official legislative document for the conference committee’s
decisions about TRA 1986; that distinction is accorded the
conference committee report. Joint Committee staff summary at
XIII. Further, by definition, the Joint Committee staff summary
may not be a complete or thorough statement of the conference
decisions; summaries are designed to cover concisely the main
points of the summarized topic, and they may lack specific
detail. However, the Joint Committee staff summary was provided
- 49 -
to the Members of the House and Senate for their reference before
Congress enacted TRA 1986, and consequently it is part of the
history of the legislation. See, e.g., Newborn v. Commissioner,
94 T.C. 610, 620, 623 (1990). Thus, before the enactment of TRA
1986, the Members of Congress had before them an interpretation
of section 163(h) that included within the definition of
“personal interest” interest on underpayments of income tax.
Although not as clearly expressed as in the Joint Committee
staff summary, the relevant portions of the Joint Statement of
Managers portion of the conference committee report may be read
to echo the views expressed in the Joint Committee staff summary.
The relevant portions of the Joint Statement of Managers portion
of the conference committee report provide that “Personal
interest also generally includes interest on tax deficiencies”
and that “personal interest does not include * * * interest
payable on estate tax deferred under sec. 6163 or 6166.” H.
Conf. Rept. 99-841, at II-154, supra, 1986-3 C.B. (Vol. 4) at
154. These portions of the Joint Statement of Managers Portion
of the conference committee report may be read to support a view
that interest on all tax underpayments other than interest in
respect of estate tax deferred under either section 6163 or 6166
is to be treated as personal interest.
Although the Joint Statement of Managers portion of the
conference committee report does not speak as clearly to the
- 50 -
issue before us as the Joint Committee staff summary does, one
may reasonably view these two pieces of legislative history as
being consistent with one another. At the very least, in light
of the Joint Committee staff summary, and the validation of
section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., supra,
by five Courts of Appeals, an interpretation of the Joint
Statement of Managers portion of the conference committee report
that includes income tax deficiencies within the definition of
personal interest cannot be said to be clearly inconsistent with
section 163(h)(2)(A). We so conclude.
We reached the opposite conclusion in Redlark v.
Commissioner, 106 T.C. at 46, and we used that conclusion as the
basis for disregarding the 1986 Blue Book. The 1986 Blue Book
provides, in pertinent part, as follows:
Personal interest also includes interest on
underpayments of individual Federal, State or local
income taxes notwithstanding that all or a portion of
the income may have arisen in a trade or business,
because such taxes are not considered derived from the
conduct of a trade or business.60 However, personal
interest does not include interest payable on estate
tax deferred under sections 6163 or 6166.
________________
60
Personal interest does not include interest on
taxes, other than income taxes, that are incurred in
connection with a trade or business. (For the rule
that taxes on net income are not attributable to a
trade or business, see Treas. Reg. sec. 1.62-1(d),
relating to nondeductibility of State income taxes in
computing adjusted gross income.) * * * [1986 Blue
Book at 266.]
- 51 -
The above quoted portion of the 1986 Blue Book clearly supports
section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., supra.
In Redlark v. Commissioner, supra, we did not assign any
weight to the 1986 Blue Book because we concluded that it
conflicted with the Joint Statement of Managers and with what we
there believed to be relevant prior caselaw. As we have
explained, supra, that caselaw construed statutory language
different from what we deal with herein. Also, the 1986 Blue
Book is consistent with the Joint Committee staff summary, and we
believe that the Joint Committee staff summary is consistent with
the Joint Statement of Managers.
Whether one views the legislative history of section 163(h)
as inconclusive or as consistent with section 1.163-
9T(b)(2)(i)(A), Temporary Income Tax Regs., supra, the 1986 Blue
Book warrants consideration. See FPC v. Memphis Light, Gas &
Water Div., 411 U.S. 458, 471-472 (1973); Bank of Clearwater v.
United States, 7 Cl. Ct. 289, 294 (1985). Consideration of the
1986 Blue Book (where, as here, it does not conflict with the
enacted statutory language and does not conflict with what we
have referred to as the conference committee sentence (supra
F.(4) Thirdly)), in combination with the Joint Committee staff
summary and the relevant portion of the Joint Statement of
Managers portion of the conference committee report points toward
a conclusion that section 1.163-9T(b)(2)(i)(A), Temporary Income
- 52 -
Tax Regs., supra, is a permissible construction of section
163(h)(2)(A). We so conclude.
We have concluded that section 163(h)(2)(A) is silent or
ambiguous. We have also concluded that section 1.163-8T,
Temporary Income Tax Regs., supra, and section 1.163-
9T(b)(2)(i)(A), Temporary Income Tax Regs., supra, are
permissible constructions of section 163(h)(2)(A). Accordingly,
we also conclude that both regulations are not invalid. To the
extent that Redlark v. Commissioner, supra, is inconsistent
herewith, we no longer follow that opinion.
H. Petitioners’ Alternative Contention
Alternatively, petitioners contend that section 1.163-
9T(b)(2)(i)(A), Temporary Income Tax Regs., supra, does not
control because it relates to section 163(h)(2)(A) as enacted by
TRA 1986, not to section 163(h)(2)(A) as amended by TAMRA 1988;
section 163(h)(2)(A) as amended by TAMRA 1988 is the provision
which applies in the instant case. Respondent contends that
section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., supra,
controls because the amendment to section 163(h)(2)(A) was not
intended to make any substantive change to the statute. We agree
with respondent.
As we stated in Redlark v. Commissioner, 106 T.C. at 34 n.3:
The amended language, effective for the years in
issue, was intended to conform the definition of
personal interest to the language of the related
passive loss and investment interest limitation
- 53 -
provisions, to permit consistent application of a
standard for allocation of interest. See S. Rept. 100-
445, at 36 (1988); H. Rept. 100-795, at 35 (1988).
There is no indication that the change in language was
intended to make any substantive change in the meaning
of the statutory language.
We hold for respondent on this issue.
Decision will be entered
for respondent.
Reviewed by the Court.
COHEN, WHALEN, HALPERN, BEGHE, and MARVEL, JJ., agree with
the majority opinion.
GERBER, CHIECHI, and GALE, JJ., concur.
FOLEY, J., did not participate in consideration of this
case.
- 54 -
Appendix
History of the Legislation
(1) The Treasury Report
In November 1984, the Treasury Department issued a report to
the President entitled “Tax Reform for Fairness, Simplicity, and
Economic Growth”, hereinafter sometimes referred to as the
Treasury Report. In the Treasury Report, the Treasury Department
explained that under then-governing law, all interest expense was
“deductible, either as a business or investment expense or as an
itemized deduction.” The Treasury Report at 83. To
curtail the subsidy implicit in the [then] current law
deduction for interest on debt to finance large amounts of
passive, tax-preferred, investment assets (such as corporate
stock) or extraordinary consumption expenditures (such as
second homes).
the Treasury Department proposed to limit the deductions
individuals could claim for interest expense “to the sum of
mortgage interest on the principal residence of the taxpayer,
passive investment income (including interest income), and $5,000
per return.” Id.(2) The President’s Proposals
In May 1985, President Reagan issued a report entitled “The
President’s Tax Proposals to the Congress for Fairness, Growth,
and Simplicity”, hereinafter sometimes referred to as the
President’s Proposals. Chapter 13.01 of the President’s
Proposals addressed interest deductions and proposed to subject,
- 55 -
inter alia, “all interest not incurred in connection with a trade
or business” to the then governing limitation on the deduction of
investment interest under section 163(d). The President’s
Proposals at 323. Underlying this proposal was a concern that
“consumer interest”, defined as “i.e., interest incurred to
acquire personal assets, such as a car or vacation home”,
undermined the then existing “limitations on investment interest
and interest incurred to acquire tax-exempt bonds.” Id. at 322-
323.
(3) The House Bill
Subsection (d) of section 163 in then-current law was
entitled “Limitation on Interest on Investment Indebtedness.” In
section 402(a) of H.R. 3838, the Ways and Means Committee
proposed to deal with several concerns by revising subsection
(d), which would be reentitled “Limitation on Nonbusiness
Interest.” The bill combined the different concerns into a
single overall test, as appears from proposed new paragraphs (1)
and (3) of subsection (d), as follows:
SEC. 402. LIMITATION ON DEDUCTION FOR NONBUSINESS INTEREST.
(a) General Rule.--Subsection (d) of section 163
(relating to limitation on interest on investment
indebtedness) is amended to read as follows:
“(d) Limitation on Nonbusiness Interest.--
“(1) In general.--In the case of a taxpayer other
than a corporation, the amount allowed as a deduction
under this chapter for nonbusiness interest for any
taxable year shall not exceed the sum of--
- 56 -
“(A) $10,000 ($20,000, in the case of a
joint return), plus
“(B) the net investment income for the
taxable year.
“In the case of a trust, the amount specified in
subparagraph (A) shall be zero.
* * * * * * *
“(3) Nonbusiness interest.--For purposes of this
subsection, the term ‘nonbusiness interest’ means any
interest allowable as a deduction under this chapter
(determined without regard to paragraph (1)); except
that such term shall not include--
“(A) any qualified residence interest, and
“(B) any interest which is allowable as a
deduction in computing adjusted gross income
and which is not attributable to a limited
business interest.
For purposes of the preceding sentence, the term
‘interest’ includes any amount allowable as a deduction
in connection with personal property used in a short
sale.[”]
The term “limited business interest” is defined (in subsec.
(d)(6)) in terms of lack of active participation in the business;
it apparently would not apply to Edward’s law practice. As to
the prior law’s deductibility of interest in computing adjusted
gross income, see infra F. (3) Pre-TRA 1986 Cases.
The Ways and Means Committee Report to accompany H.R. 3838,
H. Rept. 99-426 (1985), 1986-3 C.B. (Vol. 2) 1, states, in
pertinent part, as follows:
- 57 -
B. Interest Deduction Limitations (Sec. 402 of the bill
and sec. 163(d) of the Code)
Present Law
In general
* * * * * * *
Under present law, no limitation is imposed under
section 163(d) on the deductibility of either interest
on indebtedness incurred to purchase or carry
consumption goods, (i.e., personal (consumer)
interest), or interest on indebtedness incurred in
connection with the taxpayer’s trade or business. [H.
Rept. 99-426 at 296 supra, 1986-3 C.B. (Vol. 2) at
296.]
* * * * * * *
Explanation of Provision
In general
The bill expands the scope of the interest
limitation, and alters the calculation of the amount of
the limitation. Under the bill, all nonbusiness
interest is subject to the limitation on deductibility,
including consumer interest and certain interest that
is not treated as investment interest subject to
limitation under present law. Nonbusiness interest
subject to the limitation under the bill does not
include interest on debt secured by the taxpayer’s
principal residence (to the extent of its fair market
value), and interest on debt secured by a second
residence of the taxpayer (to the extent of its fair
market value). Interest expense that is paid or
incurred in carrying on a trade or business (except for
interest attributable to certain limited business
interests not involving low-income housing), is not
subject to the interest deduction limitation under the
bill. [Id. at 298.]
* * * * * * *
- 58 -
Interest subject to the limitation
Under the bill, interest subject to the limitation
is all interest on debt not incurred in connection with
the taxpayer’s trade or business, other than debt
secured by the taxpayer’s residences (as described
above). Thus, interest subject to limitation generally
includes investment interest subject to the section
163(d) limitation under present law and consumer
interest, such as interest paid or incurred to purchase
an automobile for personal use. * * * [Id. at 299-300.]
The House of Representatives passed H.R. 3838 without
amendment to section 402 of H.R. 3838 as reported by the Ways and
Means Committee.
(4) The Senate’s Amendment
H.R. 3838 was received in the Senate on December 18, 1985,
and referred to the Finance Committee. Section 1421 of H.R. 3838
as reported by the Finance Committee separated the above-noted
considerations--investment interest and “consumer” interest.
Section 1421(b) of the Finance Committee’s amendment revised
section 163(d) but, unlike the House-passed bill, left that Code
provision as one dealing with investment interest. Section
1421(a) of the Finance Committee’s amendment proposed a new
section 163(h), which provided in pertinent part as follows:
SEC. 1421. LIMITATIONS ON DEDUCTION FOR NONBUSINESS
INTEREST.
(a) Disallowance of Deduction for Consumer Interest of
Individuals.--Section 163 (relating to deduction for
interest) is amended by redesignating subsection (h) as
subsection (i) and by inserting after subsection (g) the
following new subsection:
- 59 -
“(h) Disallowance of Deduction for Consumer
Interest.--
“(1) In general.--In the case of a taxpayer other
than a corporation, no deduction shall be allowed under
this chapter for consumer interest paid or accrued
during the taxable year.
“(2) Consumer interest.--For purposes of this
subsection--
“(A) In general.--The term ‘consumer
interest’ means any interest allowable as a
deduction under this chapter other than interest
paid or accrued on indebtedness incurred or
continued in connection with--
“(i) the conduct of a trade or business
(other than the trade or business of
performing services as an employee), or
“(ii) an activity described in section
212.
“(B) Exception for qualified residence
interest.--The term ‘consumer interest’ shall not
include any qualified residence interest.[”]
The Senate Finance Committee report, provides, in pertinent
part, as follows (S. Rept. 99-313, at 802-806 (1986), 1986-3 C.B.
(Vol. 3) 1, 802-806):
G. Interest Deduction Limitations (sec. 1421 of the
bill and secs. 163(d) and (h) of the Code)
Present Law
* * * * * * *
Other interest
Under present law, no limitation is imposed under
section 163(d) on the deductibility of interest on
indebtedness incurred for other purposes, e.g. to
purchase or carry consumption goods. Interest on
indebtedness incurred in connection with the taxpayer’s
- 60 -
trade or business is also not subject to the section
163(d) limitation under present law.
Reasons for Change
* * * * * * *
Nonbusiness (consumer) interest
* * * * * * *
Although the committee believes it would not be
advisable to subject to income tax imputed rental
income with respect to consumer durables owned by the
taxpayer, it does believe that it is appropriate and
practical to address situations where consumer
expenditures are financed by borrowing. By phasing out
the present deductibility of consumer interest, the
committee believes that it has eliminated from the
present tax law a significant disincentive to saving.
* * * * * * *
Explanation of Provisions
In general
The bill expands the scope of the interest
limitation, and alters the calculation of the amount of
the limitation. Under the bill, all nonbusiness
interest is subject to the limitation on deductibility,
including consumer interest and certain interest that
is not treated as investment interest subject to
limitation under present law. Interest subject to the
limitation under the bill does not include interest on
debt secured by the taxpayer’s principal residence (to
the extent of its fair market value), and interest on
debt secured by a second residence of the taxpayer (to
the extent of its fair market value). Interest expense
that is paid or incurred in carrying on a trade or
business is not subject to the interest deduction
limitation under the bill (except for interest
attributable to certain limited business interests).
In general, under the bill, consumer interest is
not deductible, and the deduction for investment
interest is limited to investment income for the year
- 61 -
with an indefinite carryforward of disallowed
investment interest.
Investment interest limitation
Interest subject to the limitation.–-Under the
bill, interest subject to the investment interest
limitation is all interest (other than consumer
interest and qualified residence interest) on debt not
incurred in connection with the taxpayer’s trade or
business. * * *
* * * * * * *
Consumer interest limitation
Under the bill, consumer interest is not
deductible. Consumer interest generally includes all
interest not incurred or continued in connection with
the conduct of a trade or business (other than the
performance of services as an employee) * * *. Thus,
consumer interest includes, for example, interest on a
loan to purchase an automobile for personal use, and
credit card interest incurred for personal expenses.
In all material respects, section 1421 of H.R. 3838 as
passed by the Senate on June 24, 1986, was identical to section
1421 of H.R. 3838 as reported by the Senate Finance Committee.
Section 1401 of the Senate amendment as reported by the
Finance Committee proposed to add a new section, section 469,
relating to limitations on losses and credits from passive
activities. Neither the House bill, nor the President’s
Proposals contained a corresponding provision. H. Conf. Rept.
99-841, II-137 (1986), 1986-3 C.B. (Vol. 4) 137; Joint Committee
on Taxation, Comparison of Tax Reform Provisions of H.R. 3838 as
passed by the House and Senate (JCS-15-86), 51 (July 15, 1986).
(Section 501 of the House-passed version of the bill did,
- 62 -
however, propose to deny excess passive activity losses for
purposes of computing the amount of the alternative minimum
taxable income. See TRA 1986 sec. 701, 100 Stat. 2320, 2336;
H. Rept. 99-426, at 320-323; supra, 1986-3 C.B. (Vol. 2) 320-
323.)
Section 1401 of the Senate amendment to H.R. 3838 as
reported by the Finance Committee provides, in pertinent part, as
follows:
SEC. 469. LIMITATIONS ON LOSSES AND CREDITS FROM PASSIVE
ACTIVITIES.
* * * * * * *
(h) Regulations.--The Secretary shall prescribe such
regulations as may be necessary or appropriate to carry out
provisions of this section, including regulations--
(1) which specify what constitutes an activity or
material participation for purposes of this section,
(2) which provide that certain items of gross
income will not be taken into account in determining
income or loss from any activity (and the treatment of
expenses allocable to such income), and
(3) if necessary to prevent avoidance of this
section, determining whether income, gain, or loss from
a limited partnership or other passive activity is
treated as described in subsection (c)(3).
The Finance Committee report on H.R. 3838 did not explain
how the regulations promulgated under section 469 were to
allocate interest expense. S. Rept. 99-313, at 713-746, supra,
1986-3 C.B. (Vol. 3) at 713-746.
- 63 -
Section 1401 of the Senate amendment to H.R. 3838 was
amended by a floor amendment and passed; the amendment did not
affect the above quoted language. 132 Cong. Rec. S 8817, S 8915-
8916 (June 26, 2986); Joint Committee on Taxation, Comparison of
Tax Reform Provisions of H.R. 3838 as passed by the House and
Senate (JCS-15-86), 52 (July 15, 1986).
(5) The Conference Committee
On August 29, 1986, the staff of the Joint Committee on
Taxation published a pamphlet (hereinafter sometimes referred to
as the Joint Committee staff summary) described as follows (Joint
Committee staff summary at xiii):
This pamphlet1 provides a title-by-title summary
of the principal provisions of H.R. 3838 (Tax Reform
Act of 1986), as agreed to by the House-Senate
Conferees on August 16, 1986. As a general rule, this
pamphlet does not describe agreements of the Conferees
not to adopt a particular provision that was only in
the House-passed bill or only in the Senate-passed
bill, i.e., agreements to retain present law on
particular issues.
This pamphlet is provided for the use of the
Members of the House and the Senate. The official
legislative document on the conference decisions on
H.R. 3838 will be the conference report on the bill
(including the Statement of Managers explaining the
conference decisions).
_________________
1
This pamphlet may be cited as follows: Joint
Committee on Taxation, Summary of Conference Agreement
on H.R. 3838 (Tax Reform Act of 19886)(JCS-16-86),
August 29, 1986.
The Joint Committee staff summary describes the relevant
portion of the conference agreement as follows:
- 64 -
C. Interest Deduction Limitation
No deduction is allowed for personal interest
(such as interest on car loans or credit card balances
for personal expenditures). Interest on underpayments
of tax (other than certain deferred estate taxes) is
treated as personal interest under the provision. * * *
[Joint Committee Summary at 18.]
The conference committee report (H. Conf. Rept. 99-841,
supra, 1986-3 C.B. (Vol. 4) 1) was published on September 18,
1986. Section 511 of the conference committee report corresponds
to section 1421 of H.R. 3838 as passed by the Senate. In large
part, section 511(b) of the conference committee report tracks
section 1421(a) of H.R. 3838 as passed by the Senate. Section
511(b) of the conference committee report presents a new section
163(h), which provides in pertinent part as follows:
(h) Disallowance of Deduction for Personal Interest.--
(1) In general.--In the case of a
taxpayer other than a corporation, no
deduction shall be allowed under this chapter
for personal interest paid or accrued during
the taxable year.
(2) Personal interest.–-For purposes of
this subsection, the term “personal interest”
means any interest allowable as a deduction
under this chapter other than--
(A) interest paid or accrued on indebtedness
incurred or continued in connection with the
conduct of a trade or business (other than the
trade or business of performing services as an
employee),
(B) any investment interest (within the
meaning of subsection (d)),
- 65 -
(C) any interest which is taken into account
under section 469 in computing income or loss from
a passive activity of the taxpayer,
(D) any qualified residence interest (within
the meaning of paragraph (3)), and
(E) any interest payable under section
6601 on any unpaid portion of the tax imposed
by section 2001 for the period during which
an extension of time for payment of such tax
is in effect under section 6163 or 6166. [H.
Conf. Rept. 99-841, at I-171 (1986).]
The Joint Statement of Managers portion of the conference
committee report provides, in pertinent part, as follows:
House Bill
Under the House bill, the deduction for nonbusiness
interest of noncorporate taxpayers is limited to $10,000
($20,000 for joint returns), plus net investment income,
plus certain deductible expenditures in excess of rental
income from net lease property. * * *
* * * * * * *
Nonbusiness interest means all interest not incurred in
the taxpayer’s trade or business, including the taxpayer’s
share of interest of S corporations in whose management he
does not actively participate, the taxpayer’s share of
interest expense of limited partnerships in which he is a
limited partner, and the taxpayer’s share of interest
expense of certain trusts and other entities in which he is
a limited entrepreneur.
* * * * * * *
Senate Amendment
The Senate amendment provides that the deduction for
investment interest of noncorporate taxpayers is limited to
net investment income, plus certain deductible expenditures
in excess of rental income from net lease property.
Consumer interest is not deductible. Interest on debt
secured by the taxpayer’s principal residence and a second
- 66 -
residence of the taxpayer (to the extent of their fair
market values) is not subject to limitation.
* * * Consumer interest means interest not attributable
to a trade or business (other than the trade or business of
performing services as an employee) or to an activity
engaged in for profit.
* * * * * * *
Conference Agreement
The conference agreement follows the Senate amendment,
with modifications and clarifications.
* * * * * * *
Personal interest
The conference agreement follows the Senate amendment
provision with respect to consumer interest (denominated
personal interest under the conference agreement), with
modifications and clarifications.
Under the conference agreement, personal interest is
not deductible. Personal interest is any interest, other
than interest incurred or continued in connection with the
conduct of a trade or business (other than the trade or
business of performing services as a employee), investment
interest, or interest taken into account in computing the
taxpayer’s income or loss from passive activities for the
year. Personal interest also generally includes interest on
tax deficiencies.
Personal interest does not include qualified residence
interest of the taxpayer, nor does it include interest
payable on estate tax deferred under sec. 6163 or 6166. [H.
Conf. Rept. 99-841, at II-151 to II-154, supra, 1986-3 C.B.
(Vol. 4) at 151-154.]
In all material respects, section 511(b) as reported by the
conference committee was identical to section 511(b) of H.R. 3838
as ultimately enacted, on October 22, 1986. TRA 1986 sec.
511(b), Pub. L. 99-514, 100 Stat. 2085, 2246-2248, 2963.
- 67 -
The conference agreement on H.R. 3838 generally follows
section 1401 of the Senate amendment, relating to limitations on
losses and credits from passive activities, but with certain
modifications and clarifications. H. Conf. Rept. 99-841, at II-
138, supra, 1986-3 C.B. (Vol. 4) at 138. As modified, clarified,
and enacted, section 469 provides, in pertinent part, as follows:
SEC. 469. PASSIVE ACTIVITY LOSSES AND CREDITS LIMITED.
* * * * * * *
(k) Regulations.–-The Secretary shall prescribe such
regulations as may be necessary or appropriate to carry out
provisions of this section, including regulations–-
* * * * * * *
(4) which provide for the determination of the
allocation of interest expense for purposes of this
section * * *.[1] [TRA 1986 sec. 501(a), Pub. L. 99-514,
100 Stat. 2085, 2233, 2240.]
The Joint Statement of Managers portion of the conference
committee report explaining interest expense allocation under
section 469 provides--
Expenses allocable to portfolio income.–-The
conference agreement provides that portfolio income is
reduced by the deductible expenses (other than
interest) that are clearly and directly allocable to
such income. Properly allocable interest expense also
reduces portfolio income. Such deductions accordingly
are not treated as attributable to a passive activity.
The conferees anticipate that the Treasury will
issue regulations setting forth standards for
1
Sec. 10212(a) of the Omnibus Budget Reconciliation Act of
1987, Pub. L. 100-203, 101 Stat. 1330, 1330-405, redesignated
sec. 469(k)(4) as sec. 469(l)(4).
- 68 -
appropriate allocation of expenses and interest under
the passive loss rule. The conferees anticipate that
regulations providing guidance to taxpayers with
respect to interest allocation will be issued by
December 31, 1986. These regulations should be
consistent with the purpose of the passive loss rules
to prevent sheltering of income from personal services
and portfolio income with passive losses. Moreover,
the regulations should attempt to avoid inconsistent
allocation of interest deductions under different Code
provisions.4
In the case of entities, a proper method of
allocation may include, for example, allocation of
interest to portfolio income on the basis of assets,
although there may be situations in which tracing is
appropriate because of the integrated nature of the
transactions involved. Because of the difficulty of
recordkeeping that would be required were interest
expense of individuals allocated rather than traced, it
is anticipated that, in the case of individuals,
interest expense generally will be traced to the asset
or activity which is purchased or carried by incurring
or continuing the underlying indebtedness.
_____________________
4
For example, an interest deduction that is disallowed
under section 265 [relating to expenses and interest
relating to tax-exempt income] or 291 [relating to
special rules relating to corporate preference items]
should not be allowed, capitalized, or suspended under
another provision. [H. Conf. Rept. 99-841, at II-146,
supra, 1986-3 C.B. (Vol. 4), at 146.]
(6) 1986 Blue Book
On May 4, 1987, the staff of the Joint Committee on Taxation
published its General Explanation of the Tax Reform Act of 1986
(1986 Blue Book), which states in pertinent part as follows (pp.
262-264, 266):
C. Interest Deduction Limitations (Sec. 511 of the Act and
secs. 163(d) and (h) of the Code)55
- 69 -
Prior Law
* * * * * * *
Other interest
Under prior law, no limitation was imposed under
section 163(d) on the deductibility of interest on
indebtedness incurred for other purposes, e.g. to purchase
or carry consumption goods. Under prior and present law,
interest on indebtedness incurred in connection with the
taxpayer’s trade or business is also not subject to the
limitation on the deductibility of interest expense under
section 163.
Reasons for Change
* * * * * * *
Personal interest
Prior law excluded or mismeasured income arising from
the ownership of housing and other consumer durables.
Investment in such goods allowed consumers to avoid the tax
that would apply if funds were invested in assets producing
taxable income and to avoid the cost of renting these items,
a cost which would not be deductible in computing tax
liability. Thus, the tax system under prior law provided an
incentive to invest in consumer durables rather than assets
which produce taxable income and, therefore, an incentive to
consume rather than save.
* * * * * * *
Explanation of Provisions
In general
In general, under the Act, personal interest is not
deductible, and the deduction for investment interest is
limited to investment income for the year with an indefinite
carryforward of disallowed investment interest. The
personal interest limitation does not apply to interest on
debt secured by the taxpayer’s principal residence (to the
extent of its basis plus the amount of such debt used to pay
certain educational or medical expenses) and interest on
debt secured by a second residence of the taxpayer (to the
- 70 -
extent of its basis plus the amount of such debt used to pay
certain educational or medical expenses), provided the total
amount of such debt does not exceed the fair market value of
such residence.
* * * * * * *
Personal interest
Under the Act, personal interest is not deductible.
Personal interest is any interest, other than interest
incurred or continued in connection with the conduct of a
trade or business (other than the trade or business of
performing services as an employee), * * * investment
interest, or interest taken into account of computing the
taxpayer’s income or loss from passive activities for the
year. Thus, personal interest includes, for example,
interest on a loan to purchase an automobile, interest on a
loan to purchase a life insurance policy, and credit card
interest, where such interest is not incurred or continued
in connection with the conduct of a trade or business.
Personal interest also includes interest on underpayments of
individual Federal, State or local income taxes
notwithstanding that all or a portion of the income may have
arisen in a trade or business, because such taxes are not
considered derived from the conduct of a trade or
business.60 However, personal interest does not include
interest payable on estate tax deferred under sections 6163
or 6166.
Personal interest does not include qualified residence
interest of the taxpayer, as discussed below.
_____________
55
For legislative background of the provision, see: H.R.
3838, as reported by the House Committee on Ways and Means
on December 7, 1985, sec. 402; H.Rep. 99-426, pp. 296-301;
H.R. 3838 as reported by the Senate Committee on Finance on
May 29, 1986, sec. 1421; S.Rep. 99-313, pp. 802-808; and
H.Rep. 99-841, Vol. II (September 18, 1986), pp. 151-157
(Conference Report).
60
Personal interest does not include interest on taxes,
other than income taxes, that are incurred in connection
with a trade or business. (For the rule that taxes on net
income are not attributable to a trade or business, see
Treas. Reg. sec. 1.62-1(d), relating to nondeductibility of
State income taxes in computing adjusted gross income.) In
- 71 -
addition, personal interest does not include interest of an
S corporation which is attributable to an underpayment of
income tax from a year in which the corporation was a C
corporation or from the underpayment of the taxes imposed by
sec. 1374 or 1375. Nor does personal interest include
interest on an underpayment of income tax of a corporation
payable by a shareholder by reason of transferee liability
(under sec. 6901).
(7) TAMRA 1988
On June 10, 1987, the Technical Corrections Act of 1987 was
introduced in the House of Representatives (H.R. 2636) by Ways
and Means Committee Chairman Rostenkowski and Congressman Duncan,
and in the Senate (S. 1350) by Finance Committee Chairman Bentsen
and Senator Packwood. Section 105(c) of the bills provided as
follows:
SEC. 105. AMENDMENTS RELATED TO TITLE V OF THE REFORM ACT.
[The Tax Reform Act of 1986, see sec. 1(b)(2)
of the bills.]
* * * * * * *
(c) Amendments Related to Section 511 of the Reform
Act.--
(1) Subparagraph (A) of section 163(d)(3) of the
1986 Code (defining investment interest) is amended by
striking out “incurred or continued to purchase or
carry” and inserting in lieu thereof “properly
allocable to”.
* * * * * * *
(4) Subparagraph (A) of section 163(h)(2) of the
1986 Code is amended by striking out “incurred or
continued in connection with the conduct of” and
inserting in lieu thereof “properly allocable to”.
- 72 -
Section 119 of the bills provided that these amendments
“shall take effect as if included in the provision of the Reform
Act to which such amendment relates.”
On June 15, 1987, the staff of the Joint Committee on
Taxation released its Description of the Technical Corrections
Act of 1987 (H.R. 2636 and S. 1350) (JCS-15-87), June 15, 1987.
At pages 25 and 26, this staff pamphlet describes the above
amendments as follows:
Explanation of Provisions
Investment interest.–-The bill conforms the
language of the definition of investment interest to
the language of a related provision that allocates
interest expense to portfolio income under the passive
loss rule. Thus, under the bill, investment interest
is that which is properly allocable to property held
for investment. This change results in consistency in
the language of the provisions allocating interest
expense to the category of investment interest, and
permits consistent application of a standard for
allocation of interest. This change is not intended to
suggest the adoption of any particular method of
allocation, but rather to give Treasury the ability to
devise allocation rules as simple as possible
consistent with the objectives of the provision.
* * * * * * *
Personal interest.–-The bill conforms the language
of the definition of personal interest to the language
of related provisions (the passive loss rule and the
investment interest limitation) under which interest
expense may be allocated. Thus, the bill provides that
personal interest does not include interest that is
properly allocable to a trade or business. This change
results in consistency in the language of several
significant provisions under which interest is likely
to be allocated, and permits consistent application of
a standard for allocation of interest.
- 73 -
As amended, the provisions of the House bill were included
as Subtitle B of Title X (Revenue Provisions) of the Omnibus
Budget Reconciliation Act of 1987 (H.R. 3545) as passed by the
House in October 1987. H. Rept. 100-795, at 2. Paragraphs (1)
and (4) of section 10205(c) of the House-passed H.R. 3545 are
identical to the language of paragraphs (1) and (4) of section
105(c) of H.R. 2636 set forth supra. The description of the
amendment to the definition of “personal interest” in the House
Budget Committee’s report (the committee report for H.R. 3545) is
identical to the description of the amendment in the staff
pamphlet describing section 105(c)(4) of H.R. 2636 as introduced,
set forth supra. H. Rept. 100-391, at 1171 (1987). The report’s
description of the amendment to the definition of “investment
interest” adds to the description in the staff pamphlet
describing section 105(c)(1) of H.R. 2636 as introduced, set
forth supra. Id. at 1170. Below is the committee report
explanation of the amendment to the definition of “investment
interest”; the underscored language signifies language that was
not included in the staff pamphlet describing section 105(c)(1)
of H.R. 2636 as introduced:
Explanation of Provisions
Investment interest.–-The bill conforms the
language of the definition of investment interest to
the language of a related provision that allocates
interest expense to portfolio income under the passive
loss rule. Thus, under the bill, investment interest
is that which is properly allocable to property held
- 74 -
for investment. This change results in consistency in
the language of the provisions allocating interest
expense to the category of investment interest, and
permits consistent application of a standard for
allocation of interest. This change is not intended to
suggest that the adoption of any particular method of
allocation is required, but rather to give Treasury the
ability to devise allocation rules as simple as
possible consistent with the objectives of the
provision. The committee believes that the Treasury
should consider rules relating to the securing of
property to mitigate some of the complexities of
tracing where simplicity is desirable, so that, for
example, any interest on a loan secured by personal use
property could be considered personal interest, and any
interest on a loan secured by investment assets could
be considered investment interest. [H. Rept. 100-391,
at 1170 (1987); emphasis added.]
On December 4, 1987, Senate Budget Committee Chairman Chiles
reported S. 1920 to the Senate; part II of subtitle B of title IV
of S. 1920 as reported relates to technical amendments to TRA
1986. Paragraphs (1) and (4) of section 4665(c) of S. 1920 as
reported are identical to the language of paragraphs (1) and (4)
of section 105(c) of S. 1350 as introduced, set forth supra. The
paragraph of the document explaining the bill’s (S. 1920)
amendment to the definition of “investment interest” as reported,
except for two typographical errors, is identical to the
corresponding paragraph of the House report, set forth supra.
Reconciliation Submissions of the Instructed Committees Pursuant
to the Concurrent Resolution on the Budget for Fiscal Year 1988
(H. Con. Res. 93, Rept. 100-76), Senate Budget Committee, 100th
Cong., 1st Sess. at 272. The paragraph of the document
explaining the bill’s (S. 1920) amendment to the definition of
- 75 -
“personal interest” is identical to both the corresponding
paragraph in the House report and the staff pamphlet describing
the provision in S. 1350 as introduced, set forth supra.
Reconciliation Submissions of the Instructed Committees Pursuant
to the Concurrent Resolution on the Budget for Fiscal Year 1988
(H. Con. Res. 93, Rept. 100-76), Senate Budget Committee, 100th
Cong., 1st Sess. at 272.
As a result of a budget summit with the White House, the
technical corrections were taken out of the budget reconciliation
bill for 1987. H. Rept. 100-495, at 1014 (1987), 1987-3 C.B. at
294; 133 Cong. Rec. 34899 (Dec. 10, 1987) (colloquy between
Finance Committee Chairman Bentsen and Senator Cranston.) The
Senate then considered S. 1920, and, after completing work on
floor amendments, called up the House-passed bill (H.R. 3545),
substituted the text of S. 1920 as amended, and asked for a
conference. 133 Cong. Rec. 34935 (Dec. 10, 1987). The Senate-
passed amendment to H.R. 3545 did not include the technical
corrections in S. 1920 and they were not included in the bill as
enacted. S. Rept. 100-445 at 3.
On March 31, 1988, the Technical Corrections Act of 1988 was
introduced in the House of Representatives (H.R. 4333) by Ways
and Means Committee Chairman Rostenkowski and Congressman Duncan,
and in the Senate (S. 2238) by Finance Committee Chairman Bentsen
and Senator Packwood. Paragraphs (1) and (4) of section 105(c)
- 76 -
of the bills were identical to paragraphs (1) and (4) of section
105(c) of H.R. 2636 and S. 1350 as introduced on June 10, 1987,
set forth supra.
Section 121 of the bills (H.R. 4333 and S. 2238) provided
that these amendments “shall take effect as if included in the
provision of the Reform Act to which such amendment relates.”
On April 6, 1988, the staff of the Joint Committee on
Taxation released its Description of the Technical Corrections
Act of 1988 (H.R. 4333 and S. 2238) (JCS-10-88), March 31, 1988.
At pages 34 and 35, the staff pamphlet descriptions of the above
amendments are identical to the committee report explanations of
the same amendments to the definitions of “investment interest”
and “personal interest” as proposed in 1987, set forth supra.
On July 26, 1988, the Ways and Means Committee reported H.R.
4333 with an amendment that replaced the entire text of the
introduced bill. H. Rept. 100-795, at 1 (1988). Paragraphs (1)
and (4) of section 105(c) of the Committee’s amendment are
identical to the introduced bill’s language and to paragraphs (1)
and (4) of section 105(c) of H.R. 2636 and S. 1350 as introduced
on June 10, 1987, set forth supra. The Committee’s report
states, in pertinent part, as follows (H. Rept. 100-795, at 3
(1988)):
- 77 -
II. EXPLANATION OF THE BILL
TITLE I.–-TECHNICAL CORRECTIONS TO THE TAX REFORM ACT
OF 1986
The technical correction titles (Title I and Title
II)[2] contain clerical, conforming and clarifying
amendments to the provisions enacted by the Tax Reform
Act of 1986 (P.L. 99-514) and other recently enacted
legislation. All amendments are [sic] made by these
titles are meant to carry out the intent of Congress in
enacting the original legislation. Therefore, no
separate “Reasons for Change” is set forth for each
individual amendment. Except as otherwise described,
the amendments made by the technical correction titles
will take effect as if included in the original
legislation to which each amendment relates.
The report’s descriptions of the amendments to the
definitions of “investment interest” and “personal interest” are
identical to the descriptions in the staff pamphlet describing
the introduced bill which are identical to the 1987 committee
report descriptions of the same amendments, set forth supra.
H. Rept. 100-795, at 34, 35 (1988).
On August 3, 1988, the Finance Committee reported S. 2238
with an amendment that replaced the entire text of the introduced
bill. S. Rept. 100-445, at 1 (1988). Paragraphs (1) and (4) of
section 105(c) of the Committee’s amendment are identical to the
introduced bill’s language and to paragraphs (1) and (4) of
section 105(c) as introduced in 1987 in H.R. 2636 and S. 1350,
2
The Ways and Means Committee’s amendment added titles III
(Substantive Tax Provisions) and IV (Ways and Means Subcommittee
Provisions), and changed the short title of the bill (sec. 1(a))
to Miscellaneous Revenue Act of 1988.
- 78 -
set forth supra. The first paragraph of the Committee report’s
explanation of the bill is identical to the corresponding
paragraph of the Ways and Means Committee’s report which is
identical to the Committee report explanations of the same
amendment as introduced on June 10, 1987 in H.R. 2636 and S.
1350, set forth supra.3 S. Rept. 100-445, at 4 (1988).
The Finance Committee report’s descriptions of the
amendments to the definitions of “investment interest” and
“personal interest” are identical to the descriptions in the
staff pamphlet describing the introduced bill which are identical
to the 1987 committee report explanations of the same amendments,
set forth supra. Id. at 35, 36.
The Senate considered S. 2238 and, after completing work on
floor amendments, called up the House-passed bill (H.R. 4333),
substituted the text of S. 2238 as amended, passed H.R. 4333 as
so amended, and asked for a conference. 134 Cong. Rec. 29792
(Oct. 11, 1988). The House and Senate amendments to the
investment interest and personal interest definitions being
identical, they were approved without further explanation by the
conference committee. H. Conf. Rept. 100-1104, Vol. I at 53, 54,
3
The Finance Committee’s amendment added titles III
(Corrections to Collection and Exemption Procedures for Excise
Taxes on Diesel and Nongasoline Aviation Fuels), IV (Other
Corrections and Modifications), V (Railroad Unemployment and
Retirement Amendments), and VI (Social Security Act Amendments),
but did not change the short title of the bill (sec. 1(a)).
- 79 -
Vol. II at 2 (1988), 1988-3 C.B. 473, 492; see Staff of Joint
Committee on Taxation, Comparison of Differing Provisions of
Technical Corrections (JCX-30-88), 2 (1988).
The above-described amendments were enacted by paragraphs
(1) and (4) of section 1005(c) of the Technical and Miscellaneous
Revenue Act of 1988 (TAMRA 1988), Pub. L. 100-647, 102 Stat.
3342, 3390; by section 1019(a) of that Act they took effect as if
included in the respective TRA 1986 provisions. TAMRA 1988 sec.
1019(a), 102 Stat. at 3593.
- 80 -
RUWE, J., concurring: I agree with the result reached by
the majority; however, I cannot agree with the majority’s
suggestion that the personal nature of the underlying income tax
deficiency and the related interest plays no role in determining
the validity of section 1.163-9T(b)(2)(i)(A), Temporary Income
Tax Regs., 52 Fed. Reg. 48407 (Dec. 22, 1987). On the contrary,
as I made clear in my dissenting opinion in Redlark v.
Commissioner, 106 T.C. 31, 58, 60 (1996), I believe this to be a
relevant and important factor. The Courts of Appeals that have
addressed this issue seem to agree. See Kikalos v. Commissioner,
190 F.3d 791, 797-798 (7th Cir. 1999), revg. T.C. Memo. 1998-92;
McDonnell v. United States, 180 F.3d 721, 723 (6th Cir. 1999);
Allen v. United States, 173 F.3d 533, 537 (4th Cir. 1999);
Redlark v. Commissioner, 141 F.3d 936, 941 (9th Cir. 1998), revg.
and remanding 106 T.C. 31 (1996); Miller v. United States, 65
F.3d 687, 690-691 (8th Cir. 1995).
- 81 -
THORNTON, J., concurring: I am concerned that the majority
opinion may contribute to confusion over the interpretive weight
this Court will accord nonauthoritative congressional staff
materials.
In its analysis, the majority opinion relies heavily on
certain language appearing in the Joint Committee on Taxation
General Explanation of the Tax Reform Act of 1986 (the Blue
Book). In Redlark v. Commissioner, 106 T.C. 31, 45-46 (1996),
revd. and remanded 141 F.3d 936 (9th Cir. 1998), this Court
pointedly disregarded this same Blue Book language, stating:
Where there is no corroboration in the actual
legislative history, we shall not hesitate to disregard
the General Explanation [of the Blue Book] as far as
congressional intent is concerned. * * * Given the
clear thrust of the conference committee report, the
General Explanation [of the Blue Book] is without
foundation and must fall by the wayside. To conclude
otherwise would elevate it to a status and accord it a
deference to which it simply is not entitled.
Other opinions of this Court echo the notion that we require some
direct corroboration of congressional intentions before we defer
to Blue Book expressions thereof. See Allen v. Commissioner, 118
T.C. 1, 15 (2002) (“Although the Staff of the Joint Committee’s
explanation of a tax statute may be entitled to respect as a
document that is prepared in connection with the legislative
process by individuals who are intimately involved in that
process, we shall not hesitate to disregard the expressions set
forth therein where, as here, those expressions are barren of
- 82 -
corroboration in the legislative history.”); Zinniel v.
Commissioner, 89 T.C. 357, 367 (1987) (“the portion of the
General Explanation [of the Blue Book] * * *, standing alone,
without any direct evidence of legislative intent, is not
unequivocal evidence of legislative intent”), affd. 883 F.2d 1350(7th Cir. 1989).
The majority opinion’s reliance on the Blue Book in
overturning this Court’s decision in Redlark v. Commissioner,
supra, raises at least three concerns:
First, to the extent the majority opinion purports to find
corroboration for the Blue Book language in a Joint Committee
staff summary “published” during the conference on the 1986 Act
(and not expressly considered in this Court’s Redlark opinion),
it is unsatisfactory. The Joint Committee staff summary is
scarcely more reliable an indicator of congressional intentions
than the Blue Book itself. Like the Blue Book, the Joint
Committee summary was a staff-generated document; it was released
as a committee print rather than as a report; there is no
indication that any Member of Congress approved it during
consideration of the 1986 Act. A mere proliferation (or more
precisely, a mere doubling up) of staff-generated materials
cannot supply the want of direct evidence of congressional
intentions.
- 83 -
Second, to the extent the majority opinion means to
repudiate the views of this Court as expressed in Redlark and
other opinions, requiring some direct corroboration of Blue Book
expressions of congressional intentions, it raises significant
questions about the standard this Court now intends to apply in
assessing the interpretive weight to accord materials like the
Blue Book that technically are not part of the legislative
history. The only express clue provided by the majority opinion
appears in its statement that “if a Blue Book were to conflict
with enacted language or controlling legislative history, then
the statutory language or the controlling legislative history
would prevail.” Majority op. p. 35. This statement might be
construed as suggesting that, even in the absence of direct
corroboration in the statute or other controlling legislative
materials, a Blue Book explanation will be considered as
controlling unless it actually conflicts with these materials.
Any such suggestion is troublesome. As has been observed
elsewhere, there should be no “one generic standard for assessing
the Blue Book’s authority”; rather, the “Blue Book’s
interpretative weight depends, in large measure, on the role it
is performing.” Livingston, “What’s Blue and White and Not Quite
as Good as a Committee Report: General Explanations and the Role
of ‘Subsequent’ Tax Legislative History”, 11 Am. J. Tax Poly. 91,
105, 122 (1994). Where, as here, a Blue Book explanation does
- 84 -
more than merely collate materials from the official committee
reports or clarify inconsistencies therein, and instead purports
to add a new gloss to the statute, we should be free to disregard
the Blue Book explanation or at least accord it greatly reduced
interpretive weight.
Third, the stark divergence between this Court’s analysis in
Redlark, where we felt compelled to disregard the Blue Book
language altogether, and in the majority opinion, which appears
to treat it as a substantial component of its analysis, might be
thought to largely account for the different results then and
now. As demonstrated, however, by the decisions of the five
courts of appeal to address this issue, which have coalesced
around a straightforward analysis of judicial deference to agency
actions, the Blue Book language (with or without the Joint
Committee summary) is not dispositive of the validity of the
Treasury regulations (which is, after all, the issue before us).
Rather, the Treasury regulations are ultimately validated as
reasonably interpreting a facially ambiguous statute. The Blue
Book language in question, while supportive of this result, is
not essential to it. By unduly elevating the Blue Book’s role in
our analysis, we risk giving encouragement to inventive counsel
in future cases to troll deeply for other types of
noncontrolling legislative materials that might be argued to
betoken congressional intent.
GERBER and GALE, JJ., agree with this concurring opinion.
- 85 -
WELLS, C.J., dissenting: I respectfully dissent from the
majority’s refusal to follow Redlark v. Commissioner, 106 T.C. 31(1996), revd. and remanded 141 F.3d 936 (9th Cir. 1998). The
meaning of section 163(h)(2)(A) can be discerned from a plain
reading of the language of that section. Moreover, prior caselaw
defined the required nexus between an interest expense on a
deficiency and a trade or business, and Congress did not indicate
any intent to overturn these cases. Also, the majority placed
undue emphasis and reliance on the Blue Book in validating
section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., 52 Fed.
Reg. 48407 (Dec. 22, 1987) in contravention of precedent.
The majority contends that the language of section
163(h)(2)(A) is ambiguous, but the majority provides little
analysis of the statute itself. Section 163(h)(2)(A) provides as
follows:
Sec. 163(h) Disallowance of Deduction for Personal
Interest. -–
(1) In general.-–In the case of a taxpayer other
than a corporation, no deduction shall be allowed under
this chapter for personal interest paid or accrued
during the taxable year.
(2) Personal interest.-–For purposes of this
section, the term “personal interest” means any
interest allowable as a deduction under this chapter
other than–
(A) interest paid or accrued on indebtedness
properly allocable to a trade or business (other
than the trade or business of performing services
as an employee).
- 86 -
Petitioners contend that they should be permitted to deduct
interest paid on a deficiency arising from disallowed Schedule C
deductions relating to a sole proprietorship, a law firm.
Although section 163(h)(1) disallows personal interest
deductions, the reach of that section is truncated by section
163(h)(2)(A), which excepts interest “properly allocable” to a
trade or business from the definition of personal interest.
Congress did not provide a definition for interest “properly
allocable” to a trade or business. In interpreting what Congress
meant by “properly allocable” to a trade or business, however,
courts should give the phrase “properly allocable” its usual or
plain meaning. United States v. Urrabazo, 234 F.3d 904 (5th Cir.
2000). A reasonable reading of the phrase “properly allocable”
would conclude that the phrase means fairly or correctly relating
to a trade or business. Interest paid on deficiencies arising
from deductions taken by a sole proprietorship should fall within
this class of interest. Courts should only depart from the plain
language of a statute to, “avoid a result so bizarre that
Congress could not have intended it”. Withrow v. Roell, 288 F.3d
199, 203 (5th Cir. 2002). Reaching the conclusion that the
interest paid on a deficiency arising from a sole proprietorship
is “properly allocable” to a trade or business is surely not a
bizarre result.
The intent of Congress is best determined by examining the
language of the statute. Dial One of the Mid-South, Inc. v.
- 87 -
BellSouth Telecomms., Inc., 269 F.3d 523 (5th Cir. 2001).
Congress defined the types of interest excepted from “personal
interest” by direct references to other code sections, except for
interest “properly allocable” to trade or business income. From
this it can be inferred that the intent of Congress was to use
the plain meaning of the term “properly allocable” to trade or
business interest. In section 163(h)(2)(B), Congress refers to
section 163(d) for a definition of investment interest. In
section 163(h)(2)(C), Congress refers to section 469 for the
definition of portfolio interest. In section 163(h)(2)(D),
Congress refers to section 163(h)(3) for a definition of
qualified residence interest. In section 163(h)(2)(E), Congress
refers to section 6601. Finally, in section 163(h)(2)(F),
Congress refers to section 221 for a definition of interest on
educational loans.
Congress also provided some indication of what constitutes
interest “properly allocable” to trade or business in section
469(e), relating to the passive activity loss rules. The meaning
of “properly allocable” may be determined by looking at
adjoining words and phrases. Simmons v. United States, 308 F.2d
938, 943-944 (5th Cir. 1962). Sections 469(e)(1)(A)(i)(II) and
(III) provide:
Sec. 469(e) Special Rules for Determining Income or Loss
From a Passive Activity.--For purposes of this section–-
(1) Certain income not treated as income from
- 88 -
passive activity.-- In determining the income or loss
from any activity.--
(A) In general.-- There shall not be taken
into account–-
(i) any–
* * * * * * *
(II) expenses (other than interest)
which are clearly and directly allocable
to such gross income, and
(III) interest expense properly
allocable to such gross income * * *
In 1986, section 469(e) was enacted concurrently with
section 163(h)(2)(A). As originally enacted, section
163(h)(2)(A) read “incurred or continued in connection with the
conduct of” and was changed in 1988 to “properly allocable”.1
This was done in an effort to harmonize section 163(h)(2)(A) with
section 469(e).
When Congress enacted section 469(e) and later amended
section 163(h)(2)(A), it had the opportunity to place limits on
the relationship that an interest expense must bear to the
conduct of an active trade or business. Congress explicitly
limited the “clearly and directly allocable” standard to business
expenses and the “properly allocable” standard to interest
expenses. It reasonably can be inferred that “clearly and
1
The Technical and Miscellaneous Revenue Act of 1988,
Pub. L. 100-647, sec. 1005(c)(4), 102 Stat. 3342, 3390, H. Rept.
100-795, at 33-37 (1988).
- 89 -
directly allocable” is more restrictive than “properly
allocable”. Congress could have used the same standard, “clearly
and directly” in sections 469(e) and 163(h)(2)(A), yet, instead,
used the “properly allocable” standard for section 163(h)(2)(A).
Case law prior to the enactment of section 163(h)(2)(A)
defined the nexus between an interest expense and a trade or
business. An interest expense arising from a deficiency related
to a trade or business was treated like other business expenses
and could be deducted by a sole proprietorship. Standing v.
Commissioner, 28 T.C. 789 (1957, affd. 259 F.2d 450 (4th Cir.
1958); see Polk v. Commissioner, 31 T.C. 412 (1958), affd. 276
F.2d 601 (10th Cir. 1960); see also Reise v. Commissioner, 35
T.C. 571 (1961), affd. 299 F.2d 380 (7th Cir. 1962). The above
cases relied on sections 22(n)(1), 23(a)(1)(A) and 122(d)(5) of
the Internal Revenue Code of 1939. This definition comports with
the holding in United States v. Gilmore, 372 U.S. 39, 49 (1963),
which provided that the relevant inquiry is whether “the origin
and character of the claim with respect to which an expense was
incurred * * * is the controlling basic test of whether the
expense was ‘business’ or ‘personal’* * *”. Id.Congress is considered to be aware of these cases and the
decisions existing before enactment of legislation. Dresser
Indus. v. United States, 238 F.3d 603 (5th Cir. 2001). Congress
is considered to be aware of “all pertinent judgments by our
- 90 -
branch.” United States v. Barlow, 41 F.3d 935, 943 (5th Cir.
1994). Thus, Congress is considered to have been aware of
Standing, Polk, and Reise when enacting section 163(h)(2)(A).
The majority contends that Standing, Polk, and Reise were
rendered ineffective by the passage of section 163(h)(2)(A)
because section 163(h)(2)(A) is different from the statutes on
which the holdings of those cases were based, and thus this
change in language indicates a change in the meaning of the
statute. Majority op. p. 29 (citing Russello v. United States,
464 U.S. 16 (1983)). However, it is well settled that when
Congress seeks to overturn prior case law, it must do so in an
explicit manner; an implicit inference to change the status quo
is impermissible. Bush v. Oceans Intl., 621 F.2d 207 (5th Cir.
1980), see Sea-Land Serv., Inc. v. United States, 874 F.2d 169,
172-173 (3d Cir. 1989). Where Congress intends to overturn prior
law, it must do so in “clear, unmistakable, and unarguable
language.” United States v. Singleton, 165 F.3d 1297, 1302 (10th
Cir. 1999). Conference committee reports are valuable in
determining if Congress intended to overturn prior law, Sea-Land
Serv., Inc. v. United States, supra; see United States v.
Edwards, 23 F.2d 477 (8th Cir. 1927).
Congress did not express any intention to overturn Standing,
Polk, and Reise, in the conference committee reports or elsewhere
in the legislative history of the Tax Reform Act of 1986 (1986
- 91 -
TRA), Pub. L. 99-514, sec. 501, 100 Stat. 2233. Standing, Polk,
and Reise, were based on statutory language which permitted a
deduction for interest if it arose “in carrying on a trade or
business” and “attributable to” the taxpayer’s trade or business.
See secs. 23(a)(1)(A), 22(n), and 122(d)(5) of the Internal
Revenue Code of 1939. The majority argues that this language is
different from the language “interest paid or accrued on
indebtedness incurred or continued in connection with the conduct
of a trade or business” and the Technical and Miscellaneous
Revenue Act of 1988 (1988 TAMRA), Pub. L. 100-647, sec.
1005(c)(4), 102 Stat. 3390, language, and because of this
difference, the sections have a different meaning.
In Russello, the Supreme Court analyzed the substantive
differences between the two provisions in question. Russello v.
United States, supra at 22-24 (examining the substantive changes
and history of 18 U.S.C. sec. 1963(a)(1) (1970), the Racketeer
Influenced Corrupt Organization statute). In Russello, the
Supreme Court determined that Congress expanded a provision
beyond its original scope. Id. The majority has not engaged in
such an analysis. Additionally, the Supreme Court was construing
language in the same statute in Russello; whereas, in the instant
case, there are several statutes in question.
Moreover, it is not necessarily clear that the pre-1986 TRA
language is substantively different from the 1986 TRA language
- 92 -
and the 1988 TAMRA language. The argument that a simple change
indicates a different meaning seems to fail in the context of
1986 TRA and 1998 TAMRA, where Congress replaced “interest paid
or accrued on indebtedness incurred or continued in connection
with the conduct of a trade or business” in section 163(h)(2)(A)
with “properly allocable”. The 1988 TAMRA conference committee
report does not indicate an intent to change the meaning or reach
of section 163(h)(2)(A). However, reverting to the plain meaning
of these two phrases, it is reasonable to assert that they have
the same meaning even though the language is different. The same
should be true for the pre-1986 TRA language.
The majority concludes that the language of section
163(h)(2)(A) is ambiguous, which requires an examination of the
legislative history of the section 163(h)(2)(A), as mandated by
Chevron U.S.A. v. Natural Res. Def. Council, 467 U.S. 837 (1984).
The Joint Statement of Managers of the Conference Report, H.
Conf. Rept. 99-841, at II-151 to II-154 (1986), 1986-3 C.B. (Vol.
4) 154, published September 18, 1986 (Conference Committee
Report), provides:
Under the conference agreement, personal interest is
not deductible. Personal interest is any interest, other
than interest incurred or continued in connection with the
conduct of a trade or business (other than the trade or
business of performing services as a employee), investment
interest, or interest taken into account in computing the
taxpayer’s income of loss from passive activities for the
year. Personal interest also generally includes interest on
tax deficiencies.
- 93 -
The majority argues that the use of the term “deficiencies”
in the Conference Committee Report may be unclear and that
“generally” only excludes certain types of estate taxes from
“personal interest”. Majority op. pp. 33-34. The effect of
these arguments is to restrain the force of the Conference
Committee Report in determining the reach of what is “properly
allocable” to a trade or business.
The term deficiency means “the amount by which the income,
gift, or estate tax due under the law exceeds the amount of such
tax shown on the return.” Bregin v. Commissioner, 74 T.C. 1097,
1101-1102 (1980). The plain language of the Conference Committee
Report supports petitioners because it excepts from personal
interest “interest incurred or continued in connection with the
conduct of a trade or business.” H. Conf. Rept. 99-841, at II-
154, supra, 1986-3 C.B. (Vol. 4) at 154. The interest was
incurred as a result of a tax deficiency arising from the
operation of a sole proprietorship. The final sentence in the
above passage does not detract from this reading. “Generally” is
defined as “in disregard of specific instances and with regard to
an overall picture.” Webster’s Tenth Collegiate Dictionary 485
(1998). The use of the term “generally” indicates that the
conference committee understood that personal interest usually
includes interest on tax deficiencies; however, there are
exceptions to this rule. A reasonable inference would be that
- 94 -
interest on tax deficiencies arising from a sole proprietorship
are not within personal interest because the previous sentence
excepted that class of interest from “personal interest”. If the
conference committee intended all interest on deficiencies to be
included in personal interest, then the conference committee
could have left the word “generally” out of the last sentence, so
that personal interest would cover all interest on deficiencies.
The majority holds that the Conference Committee Report is
not clear and accordingly justifies its reliance on the Joint
Committee on Taxation General Explanation of the Tax Reform Act
of 1986, pp. 262-264, 266, published May 4, 1987 (Blue Book).
Majority op. p. 35. The majority argues that the confusion is
further exacerbated because the Blue Book provides that interest
on a tax deficiency relating to a sole proprietorship is
considered personal interest. The majority goes too far in
rejecting the Conference Committee Report in favor of the Blue
Book.
In upholding the validity of section 1.163-9T(b)(2)(i)(A),
Temporary Income Tax Regs., supra, and refusing to follow Redlark
v. Commissioner, 106 T.C. 31 (1996), the majority provides:
As applied to the instant case, section 1.163-
9T(b)(2)(I)(A), Temporary Income Tax Regs., supra, treats
petitioners’ payment of interest as nondeductible “personal
interest”. The text of section 163(h)(2)(A) does not compel
this result. The relevant legislative history, however,
lends some support to this interpretation of the statute.
[Majority op. pp. 47-48.]
- 95 -
The “legislative history” the majority relies on is the
material contained in the Blue Book and in the Joint Committee on
Taxation, Summary of Conference Agreement on H.R. 3838 (Tax
Reform Act of 1986) (JCS-16-86), August 29, 1986 (Staff Summary).
The Blue Book was published by congressional staff after the
enactment of 1986 TRA. The majority argues the Staff Summary,
which was produced before 1986 TRA was enacted, corroborates
assertions made in the Blue Book regarding personal interest.
Such reliance is unwarranted and contrary to precedent. A
staff committee’s explanation of a provision is not a statement
by legislators and was not relied on by legislators when enacting
the 1986 TRA because it was published in May 1987. McDonald v.
Commissioner, 764 F.2d 322 (5th Cir. 1985), affg. T.C. Memo 1983-
197; see Zinniel v. Commissioner, 89 T.C. 357 (1987). A staff
summary explanation provided after the enactment of a provision
is not legislative history. Guilzon v. Commissioner, 985 F.2d
819 (5th Cir. 1993), affg. 97 T.C. 237 (1991); see Zinniel v.
Commissioner, supra. The Staff Summary explanation cannot be
considered part of the legislative history because it was
authored by Congressional staff, the staff of the Joint Committee
on Taxation, and not by Congress. Estate of Hutchinson v.
Commissioner, 765 F.2d 665 (7th Cir. 1985), affg. T.C. Memo.
1984-55. The Staff Summary, however, may be given some
- 96 -
deference, especially when the staff views expressed are
consistent with items of legislative history. Id.I agree with Judge Thornton’s concurring opinion to the
extent that he concludes that the majority’s reliance on the Blue
Book is misplaced. The Blue Book represents only the view of the
Congressional staff; it was not approved by Congress.
Furthermore, the Blue Book could not have been relied upon by
Congress because it was published during the 100th Congress and
the Tax Reform Act was enacted by the 99th Congress. Also, the
Blue Book should not be relied on because it is inconsistent with
the Conference Committee Report, which would not treat interest
on a tax deficiency arising from a sole proprietorship as
personal interest, whereas the Blue Book would treat such
interest as personal interest.2 Consequently, the majority’s
reliance on the Blue Book in validating section 1.163-
9T(b)(2)(i)(A), Temporary Income Tax Regs., supra, must be
rejected.
Section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs.,
supra, was not promulgated as part of a legislative mandate
permitting the Commissioner to write regulations. Rather, those
2
The Blue Book provides: “Personal interest also includes
interest on underpayments of individual Federal, State, or local
income taxes notwithstanding that all or a portion of the income
may have arisen in a trade or business, because such taxes are
not considered derived from the conduct of a trade or business.”
Staff of Joint Comm. On Taxation, General Explanation of the Tax
Reform Act of 1986, at 266. (J. Comm. Print 1987).
- 97 -
regulations were promulgated pursuant to the Commissioner’s
section 7805(a) general power to promulgate interpretative
regulations. An interpretative regulation warrants less
deference than legislative regulation. United States v. Vogel
Fertilizer Co., 455 U.S. 16, 24 (1982). Congress did grant the
Commissioner the power to enact legislative regulations with
respect to some provisions of section 163, but not with regard to
section 163(h)(2)(A).3 The Commissioner has not promulgated
permanent regulations despite the fact that this temporary
regulation was first promulgated in 1987.
Finally, the majority’s validation of section 1.163-
9T(b)(2)(I)(A), Temporary Income Tax Regs., supra, begs a
significant policy question, and that is whether Congress ever
intended to deny individuals doing business through sole
proprietorships the advantages they would enjoy had they engaged
as a corporate form. See Redlark v. Commissioner, 106 T.C. 31,
40-41 (1996). In the year before 1986 TRA was enacted, there
were 11,928,738 nonfarm sole proprietorship returns filed with
the Internal Revenue Service,4 and as of 1999, there were
17,575,643 nonfarm sole proprietorship returns filed with the
3
See Judge Swift’s dissent pp. 103-104 and see generally
Judge Vasquez’s dissent.
4
Statistics of Income Bulletin, Vol. 20, no. 1, from table
10.–Nonfarm sole proprietorship returns: selected income
statement items for specified income years, 1980-1998, Summer
2000.
- 98 -
Internal Revenue Service.5 It is difficult to imagine that
Congress was not aware of the number of individuals engaged in
sole proprietorships in 1986. It is even more difficult to
comprehend that Congress would deny this large segment of the
business world a deduction for interest, which I believe is
clearly allocable to a trade or business, without more discussion
in the legislative history, or at least a clear directive to the
Commissioner to effect such a policy. To permit such a result is
to allow the Commissioner to make an end run around the
legislative powers of Congress.
For the foregoing reasons, I respectfully dissent.
SWIFT, COLVIN, LARO, and VASQUEZ, JJ., agree with this
dissenting opinion.
5
Statistics of Income Bulletin, Vol. 21, no. 1, from table
1.–Nonfarm sole proprietorships: business receipts, payroll, and
net income, by industrial sectors classified with the North
American Industries Classification System, Summer 2001.
- 99 -
SWIFT, J., dissenting: Mainly for the reasons set forth in
my prior concurring opinion in Redlark v. Commissioner, 106 T.C.
31, 48-49 (1996), revd. and remanded 141 F.3d 936 (9th Cir.
1998), I believe petitioners’ income tax deficiency interest
should be regarded as properly allocable to petitioners’ business
under section 163(h)(2)(A) and as deductible under section
163(a).
None of the five Courts of Appeals’ opinions cited by the
majority, or the instant majority opinion, persuades me to the
contrary. Within the jurisdictions of the other seven geographic
Courts of Appeals, taxpayers still are entitled to rely on our
Court-reviewed Redlark opinion, and that is exactly what Mr. and
Mrs. Robinson have done. Lardas v. Commissioner, 99 T.C. 490,
495 (1992).
Two separate but related facts in this case are clear and
undisputed: (1) Under the express and clear language of section
163(h)(2)(A), if an interest expense is “properly allocable” to a
trade or business, the interest expense is deductible; and
(2) the tax adjustments giving rise to petitioners’ 1987 tax
deficiency arose directly from and in connection with
petitioners’ law business. Accordingly, some portion of the
related interest expense should be allocable to the business and
should be deductible.
Under respondent’s “temporary” regulation, section 1.163-
9T(b)(2)(i)(A), Temporary Income Tax Regs., 52 Fed. Reg. 48409- 100 -
(Dec. 22, 1987), outstanding now for 15 years, petitioners’
interest expense is nondeductible regardless of the fact that it
was incurred by petitioners in connection with the business.
Respondent’s temporary regulation and position herein should be
rejected as an erroneous attempt to redefine the substantive
provision of section 163(h)(2)(A).
Respondent’s temporary regulation may provide reasonable
methods for allocating interest between a taxpayer’s business and
a taxpayer’s other activities, but if there is no question as to
what an item of interest expense relates to, then the statute is
clear and requires an allocation between the business and the
nonbusiness portions thereof, and the portion allocable to the
taxpayer’s business is to be allowed as a deduction.
Respondent’s temporary regulation, in a situation involving a
sole proprietorship trade or business and a related income tax
deficiency, improperly and contrary to the statute, establishes a
per se interest expense disallowance rule and would leave no
interest expense to be allocated.
Respondent’s temporary regulation is also inconsistent with
section 1.163-9T(b)(1)(i), Temporary Income Tax Regs., 52 Fed.
Reg. 48409 (Dec. 22, 1987), and with the allocation rule provided
in the sister regulation relating to situations where no loan
proceeds are involved in an underlying transaction or activity
(namely, where a seller or provider of goods or services provides
financing to a taxpayer or where a transaction involves interest
- 101 -
expense associated with a mere extension of credit, not a
provision of funds). Section 1.163-8T(c)(3)(ii), Temporary
Income Tax Regs., 52 Fed. Reg. 25001 (July 2, 1987), provides as
follows:
If a taxpayer incurs or assumes a debt in consideration
for the sale or use of property, for services, or for
any other purpose, or takes property subject to a debt,
and no debt proceeds are disbursed to the taxpayer, the
debt is treated for purposes of this section as if the
taxpayer used an amount of the debt proceeds equal to
the balance of the debt outstanding at such time to
make an expenditure for such property, services, or
other purpose. [Emphasis added.]
The above temporary regulation provides that in the
situations (and for any purpose) where financing and credit
transactions do not involve the disbursement of loan proceeds but
do involve the extension of credit, interest expense relating to
the extension of credit is to be allocated between the taxpayer’s
business and personal activity based on the nature of the
underlying activity giving rise to the extension of credit.
Under section 1.163-8T(c)(3)(ii), Temporary Income Tax
Regs., supra, as applicable to the instant case, even though no
loan proceeds were disbursed by the Government to petitioners,
credit was extended by the Government to petitioners, and
petitioners were charged interest with regard thereto.
Because the underlying activity in question in this case
(giving rise to the tax deficiency and to the Government’s
extension of credit to petitioners) undisputedly relates to
- 102 -
petitioners’ business, under section 1.163-8T(c)(3)(ii),
Temporary Income Tax Regs., supra, some interest expense should
be treated as properly allocable to petitioners’ business and as
deductible under the statute.
As suggested in Judge Vasquez’s dissenting opinion, in
interpreting the statutory provisions in dispute herein, the
occasional deference mandated by Chevron U.S.A., Inc. v. Natural
Res. Def. Council, Inc., 467 U.S. 837, 842-843 (1984), to
governmental agency interpretations of statutory language left
ambiguous by Congress is not applicable.
More recently, in United States v. Mead Corp., 533 U.S. 218(2001), the Supreme Court addressed the general and flexible
standard to be used by courts in evaluating what deference, if
any, should be given to agency interpretative regulations and
rulings as follows:
The fair measure of deference to an agency
administering its own statute has been understood to
vary with circumstances, and courts have looked to the
degree of the agency’s care, its consistency,
formality, and relative expertness, and to the
persuasiveness of the agency’s position * * *. * * *
[Id. at 228; fn. refs. omitted.]
And further:
“The weight [accorded to an administrative] judgment in
a particular case will depend upon the thoroughness
evident in its consideration, the validity of its
reasoning, its consistency with earlier and later
pronouncements, and all those factors which give it
power to persuade, if lacking power to control.” [Id.
at 228 (quoting Skidmore v. Swift & Co., 323 U.S. 134,
140 (1944)).]
- 103 -
Consistent with the above statement quoting Skidmore, and
before concluding whether the particular agency rulings involved
therein (of the Environmental Protection Agency and of the U.S.
Customs Service, respectively) were entitled to Chevron type
deference, in both Chevron and Mead the Supreme Court reviewed
the very “detailed and reasoned” historical aspects of the E.P.A.
ruling (Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc.,
supra at 865), and the many “angles” of the classification ruling
procedures of the U.S. Customs Service (United States v. Mead
Corp., supra at 231).1
In the instant case, however, with regard to respondent’s
promulgation of section 1.163-9T(b)(2)(i)(A), Temporary Income
Tax Regs., 52 Fed. Reg. 48409 (Dec. 22, 1987), there is scant
indication of respondent’s deliberations and degree of care
exercised prior to promulgation of the temporary regulation. No
history of the development of the temporary regulation is
available. No hearing was held. No notice and comment were
provided. No proposed regulation was made available. No history
of respondent’s development of the policy position reflected in
the temporary regulation is available. It appears to me that the
statement in the 1987 Blue Book, discussed infra, and
respondent’s failed litigating position in years prior to 1986 as
1
See Chevron U.S.A., Inc. v. Natural Res. Def. Council,
Inc., 467 U.S. 837, part VI at 853-859 (1984); United States v.
Mead Corp., 533 U.S. 218, part B at 231-234 (2001).
- 104 -
to the deductibility of income tax deficiency interest relating
to an individual’s trade or business (see cases cited infra
note 7) are the only historical “angles” that would support the
per se disallowance rule of section 1.163-9T(b)(2)(i)(A),
Temporary Income Tax Regs., supra. That being the case, Chevron
type deference is hardly appropriate.
Of the Courts of Appeals that have addressed the issue
before us, two inappropriately treat section 1.163-
9T(b)(2)(i)(A), Temporary Income Tax Regs., supra, as a
legislative regulation. See Redlark v. Commissioner, 141 F.3d
936, 940 (9th Cir. 1998); Miller v. United States, 65 F.3d 687,
690 (8th Cir. 1995). To the contrary, where it so intends,
Congress knows how to specifically delegate legislative
regulatory authority with regard to tax legislation, and nowhere
in section 163(h) do we find such a delegation. For examples of
such specific delegation of legislative authority within just the
other subsections of section 163, see section 163(f)(2)(C)
(involving interest expense on certain types of obligations that
are not in registered form); section 163(i)(5) (involving
interest expense on certain types of corporate debt instruments
with substantial original issue discount); and section 163(l)(5)
(involving interest expense on certain types of corporate
indebtedness payable in the equity of the debtor).
Although upholding it, the Court of Appeals for the Seventh
Circuit noted its concern with regard to the deference to be
- 105 -
given section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs.,
supra, as follows:
In the absence of any confirmation that the temporary
regulation has, after the fact, undergone the scrutiny
that typifies a pre-adoption notice and comment period,
one could argue that section 1.163-9T(b)(2)(i)(A) is
entitled to no more deference than a proposed
regulation. * * *
Whatever questions the “temporary” nature of this
regulation might raise as to the degree of deference it
is owed, the parties themselves have chosen not to
pursue them. * * * [Kikalos v. Commissioner, 190 F.3d
791, 796 (7th Cir. 1999), revg. T.C. Memo. 1998-92.]
With regard to the relevant legislative history relating to
enactment in 1986 of subsection (h) of section 163, I submit that
a reading thereof is available which has not yet been considered
by the various courts addressing this issue and which: (1) Would
support a plain-meaning interpretation of section 163(h)(2)(A)
(allowing the deduction of individual income tax deficiency
interest relating to a trade or business), and (2) which would
not support respondent’s per se disallowance rule.
In the Joint Statement of Managers of the Conference Report,
H. Conf. Rept. 99-841 (Vol. II) at II-154 (1986), 1986-3 C.B.
(Vol. 4), 1, 154, published on September 18, 1986, the following
statement is made:
Under the conference agreement, personal interest
is not deductible. Personal interest is any interest,
other than interest incurred or continued in connection
with the conduct of a trade or business * * * Personal
interest also generally includes interest on tax
deficiencies. [Emphasis added.]
- 106 -
The emphasized language in the above quotation from the
legislative history can be read to indicate that Congress in 1986
intended to carve out of the definition of personal interest all
interest relating to a trade or business. Once all trade or
business interest is carved out of personal interest by the above
emphasized language, the next sentence generally describing
personal interest only reaches types of interest left over, but
not business interest that already is carved out by the prior
language. With this reading of the legislative history, the last
sentence in the above quotation (namely, “Personal interest also
generally includes interest on tax deficiencies.”) may be read to
reach only interest on tax deficiencies not related to a
taxpayer’s trade or business.
Of the approximately 15 law review and journal articles pre-
and post-Redlark v. Commissioner, 106 T.C. 31 (1996), revd. and
remanded 141 F.3d 936 (9th Cir. 1998), that comment substantively
on the issue before us, seven support our original Redlark
opinion on the statutory interpretation,2 and one supports it on
2
Eller, “Interest Deduction for Noncorporate Tax
Deficiencies”, 56 Taxn. for Acct. 209, 211 (1996); Lipton,
“Redlark Reversed but Interest Deductions for Business Tax
Deficiencies is Still an Open Issue”, 89 J. Taxn. 24, 28 (1998);
Lipton, “Divided Tax Court Allows Deduction of Interest on Tax
Arising From a Trade or Business”, 84 J. Taxn. 218, 222 (1996);
Newmark & Englebrecht, “Courts Split on Individuals’ Deficiency
Interest Deduction”, 62 Prac. Tax Strat. 87, 95 (1999); Raby &
Raby, “Allocating Individual Tax Deficiency Interest”, 70 Tax
Notes 573, 575 (1996); Andreozzi, Comment, “Prohibiting the
Deduction for Noncorporate Tax Deficiency Interest: When
(continued...)
- 107 -
policy grounds3. Two articles agree with the Courts of Appeals’
reversals on the statutory interpretation.4 The balance of the
articles comment on the issue and the controversy but appear to
take no position one way or the other.5
One commentator stated:
Temp. Reg. 1.163-9T(b)(2)(i)(A) should be invalidated if it
is inconsistent with other statutes and regulations. It
appears to be in conflict with Temp. Reg. 1.163-
8T(c)(3)(ii), which was also enacted after the Blue Book
explanation was published. This regulation controls when no
loan proceeds are received as follows:
If a taxpayer incurs or assumes a debt in
consideration for the sale or use of property, for
services, or for any other purposes, or takes
property subject to a debt, and no debt proceeds
are disbursed to the taxpayers, the debt is
treated for purposes of this section as if the
taxpayer used an amount of the debt proceeds equal
2
(...continued)
Treasury Goes Too Far”, 34 J. Marshall L. Rev. 557, 579-581
(2001); Reynolds, Comment, “Redlark v. Commissioner: A ‘Bird in
the Hand’ for Noncorporate Taxpayers?”, 47 Case W. Res. L. Rev.
751, 795 (1997).
3
Engel, “Deducting Interest on Federal Income Tax
Underpayments: A Roadmap Through a 50-Year Quagmire”, 16 Va. Tax
Rev. 237, 296-297 (1996).
4
Harllee, 536-2nd Tax Mgmt. (BNA), “Interest Expense
Deductions”, at A-113 (1998); Popkin, “The Taxpayers’ Third
Personality: Comments on Redlark v. Commissioner”, 72 Ind. L.J.
41, 61 (1996).
5
7 Mertens, Law of Federal Income Taxation, sec. 26:35, at
93 (2001); Banoff et al., “After Allen, Is There Substantial
Authority for Deducting Interest on Tax Deficiencies?”, 90 J.
Taxn. 377 (1999); Banoff et al., “Two More Courts Reject Redlark
– Interest on Taxes Not Deductible”, 91 J. Taxn. 255 (1999);
Raby, “Deducting Interest on a Form 1040 Deficiency”, 67 Tax
Notes 945, 946 (1995); “Interest on Taxes Never Deductible, Ninth
Circuit Says – Redlark Reversed”, 88 J. Taxn. 260 (1998).
- 108 -
to the balance of the debt outstanding at such
time to make an expenditure for such property,
services, or other purpose.
“In the case of deficiency interest, the
Government essentially extends credit to a taxpayer and
assesses interest for the extension of that credit.
Thus, when the underlying activity which creates the
deficiency relates to a taxpayer’s business, the
interest is ‘allocable’ to the business and deductible
under section 163(h)(2)(A).” [Quoting Allen v. United
States, 987 F. Supp. 460, 466 (D.C. N.C. 1997), revd.
173 F.3d 533 (4th Cir. 1999).] Since Temp. Reg. 1.163-
9T(b)(2)(i)(A) is in direct conflict with an earlier-
enacted regulation that also covers the deductibility
of deficiency interest related to a trade or business,
Temp. Reg. 1.163-9T(b)(2)(i)(A) cannot be considered a
reasonable interpretation of the statute. [Newmark &
Englebrecht, “Courts Split on Individuals’ Deficiency
Interest Deduction”, 62 Prac. Tax Strat. 87, 95 (1999);
fn. ref. omitted.]
With regard to the Blue Book to the 1986 Act, and its
peculiar origin, we noted in our original opinion, Redlark v.
Commissioner, 106 T.C. at 45 n.7, as follows:
[W]e also note that the Tax Reform Act of 1986, Pub. L.
99-514, 100 Stat. 2085, was enacted on Oct. 22, 1986,
during the 99th Congress, whereas the General
Explanation [the Blue Book] was published on May 4,
1987, during the 100th Congress. Thus, the General
Explanation is not even entitled to the respect it
might otherwise be accorded if it had been prepared for
the Congress which enacted sec. 163(h).
See also Allen v. Commissioner, 118 T.C. 1, 14-15 (2002),
involving the alternative minimum tax under section 55 and
commenting on the limited usefulness of the Blue Book applicable
to the 1986 Act. Further with regard to the Blue Book, see the
concurring opinion herein of Judge Thornton.
- 109 -
With regard to the legal context or climate which existed in
1986, at the time subsection (h) of section 163 was added to the
Code, another commentator has stated:
The problem with the dissent’s reasoning [in our
Redlark opinion, 106 T.C. 31] is that, like the Eighth
Circuit [in Miller v. United States, 65 F.3d 687, 689-
690 (8th Cir. 1995)], it assumes that the statute is
unclear. This assumption is based on the fact that
section 163(h)(2)(A) defines personal interest by
excluding business interest without providing a
specific definition for business interest. The Eighth
Circuit in Miller held that the absence of a definition
of “business interest” created the ambiguity on which
the IRS could hang its hat.
As the Tax Court’s decision illustrates, however,
Congress does not legislate in a vacuum. Under the
prior case law, the interest on an income tax
deficiency resulting from an adjustment involving a
trade or business was treated as interest incurred in a
trade or business. If Congress is deemed to have been
aware of the law at the time it enacted Section
163(h)(2)(A), there was no ambiguity in the statutory
language. [Lipton, “Divided Tax Court Allows Deduction
of Interest on Tax Arising From a Trade or Business”,
84 J. Taxn. 218, 222 (1996).]
Lastly, as I read it, the legislative history relating to
the 1986 and the 1988 relevant legislative changes to section 163
shows that Congress, in disallowing personal interest, was
addressing “consumer” interest, not interest that was
specifically attributable to a taxpayer’s trade or business.
In sum, section 1.163-9T(b)(2)(i)(A), Temporary Income Tax
Regs., 52 Fed. Reg. 48409 (Dec. 22, 1987), is only
interpretative. After 15 years, it is still in temporary form.6
6
Since Nov. 20, 1988, temporary regulations promulgated
(continued...)
- 110 -
Taking into account “all those factors” that bear upon its
persuasiveness (see the above quotation from United States v.
Mead Corp., 533 U.S. 218, 228 (2001)), namely--
(1) The unambiguous statutory language of section
163(h)(2)(A) under which all interest expense properly
allocable to a trade or business is deductible;
(2) The relevant legislative history;
(3) The case law existing at the time section 163(h) was
enacted in 1986 that allowed a deduction for income tax
deficiency interest relating to a taxpayer’s business;7
(4) The language of section 1.163-9T(b)(1)(i) Temporary
Income Tax Regs., supra, and the language of section 1.163-
8T(c)(3)(ii), Temporary Income Tax Regs., supra,8 both of
which would support an allocation and the deduction of an
individual taxpayer’s trade or business related income tax
deficiency interest; and
(5) The lack of any indication that Treasury or respondent,
prior to promulgation of section 1.163-9T(b)(2)(i)(A),
Temporary Income Tax Regs., supra, under which a per se
disallowance rule was adopted affecting thousands of
individual taxpayers9, gave any significant policy
consideration to the question of statutory interpretation at
issue herein;
6
(...continued)
thereafter automatically sunset after 3 years. Sec. 7805(e).
7
See Reise v. Commissioner, 35 T.C. 571 (1961), affd. 299
F.2d 380 (7th Cir. 1962); Polk v. Commissioner, 31 T.C. 412(1958), affd. 276 F.2d 601 (10th Cir. 1960); Standing v.
Commissioner, 28 T.C. 789 (1957), affd. 259 F.2d 450 (4th Cir.
1958).
8
Note that sec. 1.163-8T(c)(3)(ii), Temporary Income Tax
Regs., was promulgated on July 2, 1987, 52 Fed. Reg. 25001(July 2, 1987), prior to promulgation on Dec. 22, 1987 of sec.
1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., 52 Fed. Reg.
48409 (Dec. 22, 1987).
9
See the dissenting opinion of Chief Judge Wells.
- 111 -
section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., supra,
is entitled to little, if any, deference. It is not persuasive,
and it should be rejected.
Respectfully, in my opinion, petitioners’ business-related
income tax deficiency interest should be deductible.
WELLS, COLVIN, LARO, and VASQUEZ, JJ., agree with this
dissenting opinion.
- 112 -
VASQUEZ, J., dissenting: The majority has failed to
convince me that we should not abide by our previous holding in
Redlark v. Commissioner, 106 T.C. 31 (1996), revd. and remanded
141 F.3d 936 (9th Cir. 1998). I continue to agree that section
1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., 52 Fed. Reg.
48409 (Dec. 22, 1987) (the 9T regulation), is invalid for the
reasons stated in the majority and concurring opinions in
Redlark. I write separately, however, to address the appropriate
standard of review applicable to the case at bar in light of the
U.S. Supreme Court’s opinion in United States v. Mead Corp., 533
U.S. 218 (2001), and the various Courts of Appeals’ opinions--
including the Fifth, Seventh, Eighth, Ninth, and District of
Columbia Circuit opinions--addressing Mead.
I. Mead
In Mead, the U.S. Supreme Court clarified the limits of
deference pursuant to Chevron U.S.A. Inc. v. Natural Res. Def.
Council, Inc., 467 U.S. 837 (1984), owed to an agency’s
interpretation of a statute it administers. The Court held that
an agency’s interpretation of a particular statutory provision
qualifies for Chevron deference when (1) Congress delegated
authority to the agency to make rules carrying the force of law,
and (2) the agency interpretation claiming deference was
promulgated in the exercise of that authority. United States v.
Mead Corp., supra at 226-227. Thus, the delegation of authority
by Congress to the agency is insufficient in and of itself to
- 113 -
entitle the agency implementation to Chevron deference; the
agency must also actually invoke the authority delegated. Id. at
226-227, 237.
The Court clarified Chevron by stating that the delegation
of authority may be either explicit or implicit, and when Chevron
deference applies, a reviewing court is obliged to accept the
agency’s position if Congress has not previously spoken to the
point at issue and the agency’s interpretation is reasonable.
Id. at 227, 229. Thus, any regulation entitled to Chevron
deference is binding on the courts unless procedurally defective,
arbitrary or capricious in substance, or manifestly contrary to
the statute. Id. at 227.
Precedential value alone, however, does not add up to
Chevron entitlement; interpretive rules sometimes may function as
precedents, and they enjoy no Chevron status as a class. Id. at
232. Although not limiting Chevron deference to situations where
notice-and-comment rulemaking or formal adjudications took place,
the Court focused on these attributes and stated they are
significant in determining whether Congress contemplated
administrative action with the effect of law and whether Chevron
deference is appropriate.1 Id. at 230, 231, 233, 234.
1
The Court cites numerous cases where notice-and-comment
rulemaking took place, but only one where it did not, and
Chevron deference was accorded. United States v. Mead Corp., 533
U.S. 218, 230 n.12, 231 n.13 (2001).
- 114 -
When an agency’s interpretation of a particular statutory
provision does not qualify for Chevron deference, it still may
merit some deference pursuant to Skidmore v. Swift & Co., 323
U.S. 134 (1944). United States v. Mead Corp., supra at 234-235,
237. Pursuant to Skidmore, the agency’s interpretation would be
accorded respect proportional to its “power to persuade”. Id. at
235.
II. Chronology of the Case Law Pre-Mead
A. Miller--Eighth Circuit
The U.S. Court of Appeals for the Eighth Circuit was the
first Court of Appeals to address the validity of the 9T
regulation. Miller v. United States, 65 F.3d 687 (8th Cir.
1995). The Court of Appeals for the Eighth Circuit relied on
Chevron to determine the validity of the 9T regulation. Id. at
689. The court did not state that section 163(h)(2)(A) was
ambiguous; instead, it concluded that Congress failed to define
what constitutes “business interest”2 in the statute, and this
was an implicit legislative delegation of authority to the
Commissioner. Id. at 690. But see Judge Swift’s dissent p. 104.
The court then relied on The General Explanation of the Tax
Reform Act of 1986 (Blue Book) issued by the staff of the Joint
Committee on Taxation to conclude that the 9T regulation was a
permissible construction of the statute. Id. at 690-691.
2
It is unclear why the court chose to focus on “business
interest” rather than “personal interest”.
- 115 -
B. Redlark
1. Tax Court
In Redlark, we noted that the 9T regulation was an
interpretive, rather than a legislative, regulation. Redlark v.
Commissioner, 106 T.C. at 38. We respectfully disagreed with the
Court of Appeals for the Eighth Circuit’s conclusion and held
that the 9T regulation was unreasonable and an impermissible
reading of the statute. Id. at 47.
In dissent, Judge Halpern stated that in the absence of
temporary regulations a reasonable interpretation of section
163(h)(2)(A) would include the interest here in question and that
deficiency interest attributable to nonemployee trade or business
income is not personal interest. Id. at 65 (Halpern, J.,
dissenting). In his view, however, we should have upheld the 9T
regulation as valid as it was entitled to Chevron deference. Id.
at 66 (Halpern, J., dissenting).
2. Ninth Circuit
The U.S. Court of Appeals for the Ninth Circuit, agreeing
with the Eighth Circuit, reversed. Redlark v. Commissioner, 141
F.3d at 938, 941. The Court of Appeals for the Ninth Circuit,
like that of the Eighth Circuit, also treated the 9T regulation
as a legislative regulation. Id. at 940. The court gave the 9T
regulation Chevron deference and stated that the issue was
whether the 9T regulation was a permissible interpretation of
section 163(h). Id. at 938. The Court of Appeals for the Ninth
- 116 -
Circuit acknowledged that it was reasonable that income tax
deficiencies should properly be considered allocable to their
business. Id. at 939. The court, however, applied Chevron and,
like the Eighth Circuit, relied on the Blue Book to conclude that
the 9T regulation was a permissible construction of the statute.
Id. at 939, 941.
C. Allen--Fourth Circuit
The U.S. Court of Appeals for the Fourth Circuit concluded
that section 163(h) was ambiguous. Allen v. United States, 173
F.3d 533, 534 (4th Cir. 1999). It based this conclusion on “the
absence of a statutory directive” as to the meaning of “properly
allocable” and the fact that there were “sharply divergent
opinions” in Redlark.3 Id. at 536. The court applied Chevron
and accorded the 9T regulation Chevron deference. Id. at 537.
The Court of Appeals for the Fourth Circuit also relied on the
Blue Book to conclude that the 9T regulation was a permissible
construction of the statute. Id. at 537-538.
D. McDonnell--Sixth Circuit
The U.S. Court of Appeals for the Sixth Circuit, without
analysis, simply relied on the analysis of the Court of Appeals
for the Ninth Circuit in Redlark. McDonnell v. United States,
180 F.3d 721, 723 (6th Cir. 1999).
3
This suggests that every time a statute fails to define a
word or term, or any time judges disagree regarding the meaning
of a word or phrase in a statute, the statute is automatically
ambiguous.
- 117 -
E. Kikalos--Seventh Circuit
The U.S. Court of Appeals for the Seventh Circuit
acknowledged that the 9T regulation is an interpretive
regulation. Kikalos v. Commissioner, 190 F.3d 791, 795 (7th Cir.
1999), revg. T.C. Memo. 1998-92 (which relied on our opinion in
Redlark). The Court of Appeals for the Seventh Circuit stated
that “interpretive regulations of this sort, when subject to a
notice-and-comment procedure, are reviewed deferentially, under
the criteria articulated in” Chevron and its progeny. Id. The
court noted that the 9T regulation did not go through notice-and-
comment and that such a regulation might be entitled to no more
deference than a proposed regulation.4 Id. at 796. The Court of
Appeals for the Seventh Circuit, however, left for another day
what deference a regulation of this sort is due because the
parties assumed Chevron deference applied. Id. Therefore, the
court accorded the 9T regulation Chevron deference. Id.
The Court of Appeals for the Seventh Circuit acknowledged
that in light of the cases predating the Tax Reform Act of 1986
(TRA 1986), Pub. L. 99-514, 100 Stat. 2085, one could argue with
some force that where an income tax deficiency results from a
taxpayer’s trade or business the interest accrued on that
deficiency should be allocable to the trade or business. Id. at
4
Proposed regulations are generally not afforded any more
weight than that of the position advanced by the Commissioner on
brief. Gen. Dynamics Corp. v. Commissioner, 108 T.C. 107, 120
(1997); Laglia v. Commissioner, 88 T.C. 894, 897 (1987).
- 118 -
797-798. Based on the Blue Book and the deference to be accorded
under Chevron, however, the court upheld the validity of the
regulation. Id.F. Summary of the Cases
Thus, all five of the Courts of Appeals accorded the 9T
regulation Chevron deference.
III. Post-Mead Case Law
In the years that have passed since the U.S. Courts of
Appeals issued their opinions regarding the 9T regulation,
principles of law have developed regarding the Chevron doctrine.
See supra, part I. The U.S. Court of Appeals for the Fifth
Circuit, the circuit to which appeal in the instant case lies,
has stated: “Mead clarified that Chevron’s expansive conception
of judicial deference to an administrative agency’s legal
interpretation applies only when ‘Congress delegated authority to
the agency generally to make rules carrying the force of law, and
* * * the agency interpretation claiming deference was
promulgated in the exercise of that authority.’” Pool Co. v.
Cooper, 274 F.3d 173, 177 n.3 (5th Cir. 2001). In the absence of
Chevron deference, pursuant to Mead, the agency’s interpretation
is accorded respect under Skidmore according to its “power to
persuade”. Id. at 177; see also Landmark Legal Found. v. IRS,
267 F.3d 1132, 1135-1136 (D.C. Cir. 2001) (when Chevron deference
does not apply, the IRS’s interpretations are entitled to “no
more than the weight derived from their ‘power to persuade.’”).
- 119 -
In light of Mead, Chevron deference is reserved for only
those agency interpretations reached through notice-and-comment
or comparable formal administrative procedures. Ind. Family &
Soc. Servs. Admin. v. Thompson, 286 F.3d 476, 480 (7th Cir.
2002); TeamBank, N.A. v. McClure, 279 F.3d 614, 619 (8th Cir.
2002); U.S. Freightways Corp. v. Commissioner, 270 F.3d 1137,
1141 (7th Cir. 2001) (involving the Commissioner of Internal
Revenue), revg. 113 T.C. 329 (1999). While the Supreme Court
left open the possibility that Chevron deference may be
appropriate in instances similar to notice-and-comment rulemaking
or formal adjudication, it did not clearly outline these
instances.5 Matz v. Household Intl. Tax Reduction Inv. Plan, 265
F.3d 572, 574 (7th Cir. 2001). Agency interpretations that are
not the result of such formal administrative procedures are
entitled to the lesser deference accorded under Skidmore. Ind.
Family & Soc. Servs. Admin. v. Thompson, supra at 480; Teambank,
N.A. v. McClure, supra at 619 n.4; U.S. Freightways Corp. v.
Commissioner, supra at 1141.
Furthermore, in applying Mead, “mere ambiguity in a statute
is not evidence of congressional delegation of authority”, agency
authority is not to be lightly presumed, and courts should not
5
“Only when agencies act through ‘adjudication[,] notice-
and-comment rulemaking, or * * * some other [procedure]
indicat[ing] comparable congressional intent [whatever that
means]’ is Chevron deference applicable * * * .” United States
v. Mead Corp., supra at 240 (Scalia, J., dissenting).
- 120 -
presume a delegation of power based solely on the fact that there
was not an express withholding of such power. Mich. v. EPA, 268
F.3d 1075, 1082 & n.2 (D.C. Cir. 2001).
The fact that a court pre-Mead found the agency’s position
to be reasonable under the Chevron standard is insufficient;
after Mead, if Chevron is inapplicable the agency’s position must
be persuasive. Matz v. Household Intl. Tax Reduction Inv. Plan,
supra at 573-575 (applying this rule to the IRS). It is “plain
error for [courts] to rely on” Chevron in determining what
deference to give agency actions without considering Mead. Am.
Fedn. of Govt. Employees, AFL-CIO v. Veneman, 284 F.3d 125, 129
(D.C. Cir. 2002). To the extent decisions using a pre-Mead
analysis differ from the analysis set forth in Mead, Mead
controls. Hall v. U.S. EPA, 273 F.3d 1146, 1156 n.6 (9th Cir.
2001).
IV. Applying Mead to This Case
I note that “Chevron has had a checkered career in the tax
arena.” Cent. Pa. Sav. Association v. Commissioner, 104 T.C.
384, 391 (1995). “The degree to which courts are bound by agency
interpretations of law has been like quicksand. The standard
seems to have been constantly shifting, steadily sinking, and,
from the perspective of the intermediate appellate courts,
frustrating.” Wolpaw v. Commissioner, 47 F.3d 787, 790 (6th Cir.
1995), revg. T.C. Memo. 1993-322.
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We have previously avoided, pre-Mead, the question of
whether temporary regulations promulgated without notice-and-
comment procedures are entitled to Chevron deference.
UnionBanCal Corp. v. Commissioner, 113 T.C. 309, 316-317 (1999).
We also have previously questioned, pre-Mead, whether
Chevron applies to interpretive regulations. Cent. Pa. Sav.
Association v. Commissioner, supra at 391 (citing E.I. duPont de
Nemours & Co. v. Commissioner, 41 F.3d 130 (3d Cir. 1994), affg.
102 T.C. 1 (1994)). The question of what deference interpretive
regulations, including temporary regulations issued without
notice-and-comment procedures, are entitled needs to be answered
in light of Mead.
The first question in the Mead analysis is whether Congress
delegated authority to the agency to make rules carrying the
force and effect of law. United States v. Mead Corp., supra at
226-227; Pool Co. v. Cooper, supra at 177 n.3. The second
question is whether the agency invoked that authority. United
States v. Mead Corp., supra; Pool Co. v. Cooper, supra. In this
case, however, even assuming that we were to answer the first
question in the affirmative, we must answer the second question--
whether the agency invoked the authority delegated--in the
negative for the reasons set forth below.
Regulations are either legislative or interpretive in
character. Tutor-Saliba Corp. v. Commissioner, 115 T.C. 1, 7
(2000). Interpretive regulations are promulgated under the
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general authority vested in the Secretary by section 7805,
whereas legislative regulations are issued pursuant to a specific
congressional delegation to the Secretary. Id.; Hefti v.
Commissioner, 97 T.C. 180, 189 (1991), affd. 983 F.2d 868 (8th
Cir. 1993). “An interpretive regulation may be contrasted to a
legislative regulation, one which is mandated specifically in the
statute and has the force and effect of law.” Matheson v.
Commissioner, 74 T.C. 836, 840 n.7 (1980).
In Redlark v. Commissioner, 106 T.C. at 38, we stated:
The regulations involved herein were promulgated
pursuant to the general authority granted to the
Secretary of the Treasury by section 7805(a) and not
pursuant to specific legislative authority, T.D. 8168,
1988-1 C.B. 80, 83; they are therefore interpretive.
The majority opinion in this case agrees with this conclusion,
and the Commissioner concedes that the 9T regulation is an
interpretive regulation. Majority op. p. 40. As such, even if
the statute were ambiguous, but see Chief Judge Wells’s dissent,
and assuming Congress delegated authority to the IRS to make
rules carrying the force and effect of law in this area, but see
Judge Swift’s dissent p. 104, it appears that by choosing to
issue the 9T regulation pursuant to section 7805 the Commissioner
did not issue the 9T regulation pursuant to a specific
congressional delegation authority having the force and effect of
law. See Tutor-Saliba Corp. v. Commissioner, supra at 7;
Matheson v. Commissioner, supra at 840 n.7. Thus, the 9T
regulation is not entitled to Chevron deference; it is only
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entitled to Skidmore deference.6 United States v. Mead Corp.,
supra at 234-235; Pool Co. v. Cooper, supra at 177.
V. The Majority Opinion
The majority relies on the pre-Mead opinions of the U.S.
Courts of Appeals for the Fourth, Sixth, Seventh, Eighth and
Ninth Circuits to support its conclusion that the 9T regulation
is valid. Majority op. pp. 10-13. This is wrong, as these cases
were all decided pre-Mead. Am. Fedn. of Govt. Employees, AFL-CIO
v. Veneman, supra at 129; Hall v. U.S. EPA, supra at 1156 n.6;
Matz v. Household Intl. Tax Reduction Inv. Plan, supra at 575.
In judging the validity of the 9T regulation, the majority
accords an interpretive regulation “considerable weight”, states
that it will uphold interpretive regulations if they implement
the congressional mandate in some reasonable manner, applies the
pre-Mead analysis, and gives the 9T regulation Chevron deference.
Majority op. pp. 40-41, 43, 51-52. In light of Mead, this
analysis is improper.
Additionally, as is pointed out by Judge Thornton in his
concurring opinion, the majority relies on the Joint Committee
6
It also appears that the 9T regulation is not entitled to
Chevron deference for another reason: The 9T regulation did not
go through notice-and-comment, there is no evidence that it went
through comparable formal administrative procedures, and it
remains in temporary form 15 years later. Ind. Family & Soc.
Servs. Admin. v. Thompson, 286 F.3d 476, 480 (7th Cir. 2002);
TeamBank, N.A. v. McClure, 279 F.3d 614, 619 (8th Cir. 2002);
U.S. Freightways Corp. v. Commissioner, 270 F.3d 1137, 1141 (7th
Cir. 2001), revg. 113 T.C. 329 (1999); Kikalos v. Commissioner,
190 F.3d 791, 796 (7th Cir. 1999), revg. T.C. Memo. 1998-92.
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staff summary (even though the conference committee chose to
adopt language less restrictive than the staff summary) and on
the Blue Book (even though the Blue Book goes far beyond the
language of the conference committee report to insert ideas from
the staff summary that it previously suggested to the conference
committee, but which the conference committee rejected and even
though the Blue Book was published during the 100th Congress
while TRA 1986 was enacted during the 99th Congress). Majority
op. pp. 17-18, 35. For the reasons stated in Judge Thornton’s
concurring opinion, our opinion in Redlark, and Judge Laro’s
concurring opinion in Redlark, I find this reliance unpersuasive.
See also Judge Swift’s dissent p. 108.
The majority acknowledges that section 163(h)(2)(A) does not
compel the result contained in the 9T regulation but relies on
the Joint Committee staff summary and Blue Book to conclude the
9T regulation is a permissible construction. Majority op. pp.
47-52. This would be a slender reed on which to conclude that
the 9T regulation has the power to persuade and is entitled to
deference under Skidmore v. Swift & Co., supra, especially in
light of the acknowledgment that a reasonable interpretation of
section 163(h)(2)(A) is that income tax deficiency interest
attributable to nonemployee trade or business income should
properly be considered allocable to a trade or business and that
the pre-TRA 1986 case law also supports this conclusion. Kikalos
v. Commissioner, 190 F.3d at 797-798; Redlark v. Commissioner,
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141 F.3d at 939; Redlark v. Commissioner, 106 T.C. at 65(Halpern, J., dissenting).
Deference only sets the framework for judicial analysis; it
does not displace it. United States v. Vogel Fertilizer Co., 455
U.S. 16, 24 (1982); United States v. Cartwright, 411 U.S. 546,
550 (1973); Dresser Indus., Inc. v. Commissioner, 911 F.2d 1128,
1137 (5th Cir. 1990). The majority relies on Courts of Appeals
opinions predating United States v. Mead Corp., supra, to analyze
the validity of section 1.163-9T, Temporary Income Tax Regs. The
majority’s analysis is incorrect; therefore, I respectfully
dissent.
WELLS, SWIFT, COLVIN, and LARO, JJ., agree with this
dissenting opinion.