Lead Opinion
OPINION
Respondent determined deficiencies in petitioners’ 1989 and 1990 Federal income taxes in the amounts of $46,409 and $6,927, respectively. The issue in dispute is whether petitioners may deduct certain interest on
All the facts have been stipulated. The stipulation of facts and attached exhibits are incorporated herein by this reference.
Background
At the time the petition was filed, petitioner James E. Redlark was a resident of Palm Springs, California, and petitioner Cheryl L. Redlark was a resident of South Lake Tahoe, California.
Respondent examined petitioners’ Federal income tax returns for 1979, 1980, 1981, 1982, 1983, 1984, and 1985, following which respondent and petitioners agreed to adjustments to petitioners’ income for each of the years.
The adjustments were due in part to a correction for errors made in converting petitioners’ revenue from Carrier Communications, petitioners’ unincorporated business, from an accrual basis to cash basis for tax purposes. The adjustments involved the timing of the reporting of business income. .
In 1989 and 1990, petitioners paid interest on the Federal income tax deficiencies for the 1982, 1984, and 1985 years.
On Schedule C of their 1989 and 1990 Federal income tax returns, petitioners claimed an allocable portion of such interest as a business expense.
Respondent disallowed a business deduction for the interest but did allow 20 percent of the interest paid in 1989 and 10 percent of the interest paid in 1990 as a deduction under the phase-in provisions of section 163(h)(5).
Petitioners assert that the amount of the interest expense which they have calculated as being attributable to Carrier Communications is an ordinary and necessary expense of a trade or business under section 162, deductible in computing adjusted gross income under section 62(a), and is therefore not personal interest under section 163(h).
Petitioners reply that section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., supra, is invalid insofar as it disallows a deduction for interest on a deficiency that is an ordinary and necessary expense of a trade or business.
Section 62(a) provides in part:
SEC. 62(a). General Rule. — For purposes of this subtitle, the term “adjusted gross income” means, in the case of an individual, gross income minus the following deductions:
(1) Trade and business deductions. — The deductions allowed by this chapter (other than by part VII of this subchapter) which are attributable to a trade or business carried on by the taxpayer, if such trade or business does not consist of the performance of services by the taxpayer as an employee.
Section 162(a) provides in part:
There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business * * *
Section 163(h) provides in part:
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 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 tp a trade or business (other than the trade or business of performing serv- ■ ices as an employee),
Before proceeding to a determination of the effect of pertinent regulations, we must first consider whether the interest expense involved herein is sufficiently connected to the business of Carrier Communications so as to satisfy the “properly allocable to a trade or business” exception of section 163(h)(2)(A), without regard to the regulations.
Initially, we note that respondent does not. question petitioners’ calculation of the amounts of the total interest
In Standing v. Commissioner,
In Polk v. Commissioner,
In Reise v. Commissioner,
To complete our analysis of the pre-section 163(h) situation, we note that because of explicit legislative history the deduction of State income taxes on business income, in computing adjusted gross income under predecessors of section 62(a)(1), has been denied, in contrast to its allowance where net operating losses were involved and the allowance of a deduction for interest on Federal income tax deficiencies under predecessors of section 62(a)(1). Tanner v. Commissioner,
Respondent argues that Polk v. Commissioner, supra, compels the conclusion that, as a general rule, deficiency interest is not a business expense, and that the cases recognizing a deduction are unfounded and wrong. Respondent’s argument rests on the following statement of the Court of Appeals for the Tenth Circuit:
Unless it can be said that the failure to properly evaluate inventories, which form a part of a taxpayer’s return, arises because of the nature of the business, and is ordinarily and necessarily to be expected, interest ona deficiency assessment does not arise out of the ordinary operation of the business and may not be deducted. [Polk v. Commissioner, 276 F.2d at 603 ; fn. ref. omitted.]
This statement is rooted in the requirement that deficiency interest must be attributable to a trade or business to be deductible, which we found to be the case in Polk v. Commissioner, supra. Clearly, this statement does not support a per sé denial of the deduction of deficiency interest in view of the fact that the Court of Appeals affirmed our decision that such interest was an ordinary and necessary expense for net operating loss purposes. It may be that the above-quoted language narrows the types of situations where the ordinary and necessary business expense requirement of section 162 has been satisfied. Indeed, we are satisfied that, given the source of the income tax adjustments herein, i.e., accounting errors in applying cash and accrual methods, petitioners have satisfied any such narrow standard. Reise v. Commissioner, supra (cash versus accrual changes); cf. Polk v. Commissioner, supra (involving inventory valuations). We reject respondent’s attack to the extent that it goes beyond the above quotation from Polk and is directed against the pre-section 163(h) decided cases generally.
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).
With the foregoing as background, we address the critical issue before us, namely, the effect of section 163(h)(2)(A) and section 1.163-8T, Temporary Income Tax Regs., 52 Fed. Reg. 24999 (July 2, 1987), and section 1.163-9T(b)(2)(i)(A), Tern-
Initially, we note that temporary regulations are accorded the same weight as final regulations. Peterson Marital Trust v. Commissioner,
Recently, the Supreme Court summarized the standard of review as follows:
Under the formulation now familiar, when we confront an expert administrator’s statutory exposition, we inquire first whether “the intent of Congressis 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 v. Variable Annuity Life Ins. Co.,513 U.S. _ , _,115 S. Ct. 810 , 813-814 (1995); citations omitted.]
Section 163(h)(2)(A) was added to the Internal Revenue Code by the Tax Reform Act of 1986, Pub. L. 99-514, sec. 511(b), 100 Stat. 2085, 2246. The key phrase that governs the disposition of this case involves the exception from personal interest of “interest paid or accrued on indebtedness properly allocable to a trade or business”. We have previously noted that the original version of this provision was different but that the language change was not intended to make any substantive change. See supra note 3. Arguably, this language in and of itself is sufficient to enable petitioners to prevail, since such interest on Federal income tax deficiencies was considered, at least in situations such as that involved herein, as an ordinary and necessary business expense under predecessors of section 162 and therefore of section 62(a)(1) by the pre-section 163(h) cases, a view also adopted with respect to net operating loss carryovers and carrybacks. Reise v. Commissioner,
Against the foregoing background, we consider the regulatory framework and legislative history that relate to' the deductibility of interest on income tax deficiencies. Section 1.163-9T(b)(l)(i), Temporary Income Tax Regs., 52 Fed. Reg. 48409 (Dec. 22, 1987), specifically references section 1.163-8T, Temporary Income Tax Regs., supra, by providing that interest is not personal interest if it is “paid or accrued on indebtedness properly allocable (within the meaning of §1.163-8T) to the conduct of a trade or business”. Additionally,
Section 1.163-8T, Temporary Income Tax Regs., supra, establishes an allocation method based on the expenditure, i.e., the use, of the debt proceeds. It provides in paragraph (c)(1):
(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. * * * [52 Fed. Reg. 25000 (July 2, 1987).]
On this basis, it can be argued that the proceeds of an individual’s income tax indebtedness cannot be considered as expended in a trade or business. From this it would follow that section 1.163 — 9T(b)(2)(i)(A), Temporary Income Tax Regs., supra, which treats interest on income tax deficiencies as personal interest (see infra pp. 42-43), simply represents a specific example of the application of the expenditure method of allocation of indebtedness set forth in section 1.163-8T, Temporary Income Tax Regs., supra, and is therefore valid.
The question to be resolved is whether section 7805(a) provides a sufficient basis to justify the application of the expenditure method of allocation set forth in section 1.163-8T(c), Temporary Income Tax Regs., supra, to the factual situation involved herein. Whatever the merits of such method of allocation may be in other contexts, we do not think that the Secretary of the Treasury should be entitled to use the authority conferred by section 7805(a) to construct a formula which excludes an entire category of interest expense in disregard of a business connection such as exists herein. Such a result discriminates against the individual
Nor do we think that the reasonableness of the expenditure method of allocation, as applied to the facts herein, can be supported by the fact that the Secretary chose the expenditure method after considering a pro rata apportionment method of allocation that might have produced a different result in respect of interest on business-related income tax deficiencies but which the Secretary viewed as involving “practical and theoretical problems”, at the same time conceding that such problems would not necessarily preclude the adoption of a pro rata apportionment method in the future. T.D. 8145, 1987-
Moreover, we are not convinced that the reach of section 1.163-8T, Temporary Income Tax Regs., supra, necessarily provides a sufficient basis for validating, under all circumstances, the specific provision of section 1.163-9T, Temporary Income Tax Regs., supra. Thus, section 1.163-8T(b)(5), Temporary Income Tax Regs., 52 Fed. Reg. 25000 (July 2, 1987), defines personal expenditure to mean “an expenditure that is not a business expenditure” and section 1.163-8T(c)(3)(ii), Temporary Income Tax Regs., 52 Fed. Reg. 25001 (July 2, 1987), provides:
(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 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.
Under this provision, it would appear permissible to analyze the elements of the income tax indebtedness to determine whether its imputed expenditure is properly allocable to business activity. Indeed, such an interpretation would be consistent with the overall legislative purpose in enacting section 163(h);. namely to end the deduction for interest incurred to fund consumption expenditures. S. Rept. 99 — 313, at 804 (1985), 1986-3 C.B. (Vol. 3) 1, 804; H. Conf. Rept. 99-841, at 11-154 (1986), 1986-3 C.B. (Vol. 4) 1, 154. To conclude that an income tax deficiency is ipso facto a consumption expenditure begs the issue. Thus, aside from our conclusion that the regulatory provisions contained in section 1.163-8T, Temporary Income Tax Regs., supra, are unreasonable as applied to the facts herein, it is possible to conclude that the provisions are sufficiently elliptical so that thé validity of section 1.163-9T, Temporary Income Tax Regs., supra, can, in any event, be appropriately independently determined. Accordingly, we turn our attention to that task.
Section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., 52 Fed. Reg. 48409 (Dec. 22, 1987), provides:
(2) Interest relating to taxes — (i) In general. Except as provided in paragraph (b)(2)(iii) of this section, personal interest inclúdes interest—
(A) Paid on underpayment of individual Federal, State or local income taxes * * * regardless of the source of the income generating the tax liability;
The only legislative history of section 163(h) which directly addresses the issue involved herein is the conference committee report, which states:
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[n] 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 generallyincludes interest on tax deficiencies. [H. Conf. Rept. 99-841, supra at II— 154, 1986-3 C.B. (Vol. 4) at 154.]
The General Explanation of the Tax Reform Act of 1986 elaborates on this statement by providing as follows:
Personal interest also includes interest on underpayment 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 * * *
Were it not for the foregoing, we would have been inclined to conclude that the provisions of section 163(h)(2)(A) standing alone would not have provided a sufficient basis for upholding the regulation. We so state because 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. See Santa Anita Consol., Inc. v. Commissioner,
We first address the language of the conference committee report. Respondent argues that the word “generally” was intended only to permit deduction of interest on past-due business taxes, such as sales and excise taxes which the regulations specifically exclude from the definition of personal interest. See sec. 1.163-9T(b)(2)(iii)(A), Temporary Income Tax Regs., 52 Fed. Reg. 48409 (Dec. 22, 1987). On this basis, respondent concludes that section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., supra, is reasonable and that additional proof of reasonableness is provided by the statement in the Joint Committee Staff Explanation. See supra p. 43. This approach is also articulated by the Court of Appeals for the Eighth Circuit in Miller v. United States,
We think both respondent and the Court of Appeals for the Eighth Circuit overlook the use of the word “deficiencies” in the sentence in the conference committee report. That word has had a long-established and well-known meaning. It has been described as a “term of art”. Bregin v. Commissioner,
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
Nor can respondent’s position be salvaged by the Joint Committee Staff Explanation. Such a document is not part of the legislative history although it is entitled to respect. E.g., Condor International, Inc. v. Commissioner,
Respondent further argues that Congress has failed to express dissatisfaction with the regulation in subsequent legislative actions in 1988 and 1990. According to National Muffler Dealers Association, Inc. v. United States,
The second action is a 1990 proposal of the Senate Finance Committee to amend section 163 by eliminating the deduction for corporate taxpayers of interest on income tax deficiencies. In explaining the proposed change of law, the committee states:
Individuals are not permitted to deduct personal interest. For this purpose, personal interest includes interest on underpayment of the individual’s income taxes, even if all or a portion of the individual’s income is attributable to a trade or business. [136 Cong. Rec. S15711 (Oct. 18, 1990).]
First, this statement is not reliable evidence of congressional approval, considering that it is only a proposal entered into the Senate record, and that the provision was not approved by Congress, nor is there any indication that the House of Representatives even reviewed the proposal. Furthermore, the proposed amendment contains an express
One final comment. Suppose that the only income reported on the return of petitioners had been Schedule C income from Carrier Communications and that the entire deficiency related to the type of errors that the courts have previously concluded were expected to occur in the ordinary course of business. E.g., Polk v. Commissioner,
In light of the foregoing, and with all due respect to the Court of Appeals for the Eighth Circuit, we hold that, as applied to the circumstances involved herein, section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., supra, constitutes an impermissible reading of the statute and is therefore unreasonable. Accordingly, we further hold that the interest involved herein is interest “on indebtedness properly allocable to a trade or business” and therefore excluded from personal interest under section 163(h)(2). In so holding, we emphasize that there will be situations where a Federal income tax deficiency will not be as narrowly focused as is the case herein, and therefore interest paid on the deficiency may not be said to constitute an ordinary and necessary business expense allocable within the meaning of section 163(h)(2)(A). Indeed, the situation in Miller v. United States,
In order to take into account mathematical corrections encompassed by the stipulation of the parties,
Decision will be entered under Rule 155.
Reviewed by the Court.
Notes
Unless otherwise indicated, ail section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
In Tippin v. Commissioner,
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:
(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.
The standard adopted by Aaron v. Commissioner,
In Maxcy v. Commissioner,
The judicial history of Miller v. United States,
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.) * * *
[Staff of Joint Comm, on Taxation, General Explanation of the Tax Reform Act of 1986, at 266 (J. Comm. Print 1987).]
In this connection, wo 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 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 Lawson v. Commissioner,
Concurrence Opinion
concurring: Two significant facts are clear and undisputed in this case: (1) Under the express language of section 163(h)(2)(A), if an interest expense is properly alloca-ble to a trade or business, then under that statute the interest expense is deductible; and (2) the interest expense at issue herein arose from, in connection with, and is allocable to; petitioners’ business. Accordingly, the interest expense should be deductible.
Under respondent’s regulation and position herein, petitioners’ interest expense is not deductible “regardless” of the fact that it was clearly incurred by petitioners in connection with, and that it is undisputably allocable to, petitioners’ business. Respectfully, respondent’s regulation and position herein should be rejected as an erroneous attempt to redefine the substantive provision of section 163(h)(2)(A).
I reiterate and emphasize that the statute speaks for itself. Thereunder, at the least, if an interest expense clearly relates to. and is allocable to a taxpayer’s business, it is deductible. Respondent’s regulation may provide reasonable methods for allocating interest between a taxpayer’s business and personal activities. But if there is no question as to what an item of interest expense relates to, and is allocable to, then the statute is clear and, if the expense relates to the taxpayers’ business, the statute allows the deduction. Because section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., 52 Fed. Reg. 48409 (Dec. 22, 1987), in the context of a sole proprietorship, provides that regardless of that fact, an interest expense is not deductible, respondent’s regulation should be considered invalid.
The statute mandates an allocation and allows, a .deduction for an interest expense related to a taxpayer’s business. Respondent’s regulation, in the situation of a sole proprietor, would leave nothing to be allocated.
Further, respondent’s position herein and her regulation under section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., 52 Fed. Reg. 48409 (Dec. 22, 1987), is inconsistent
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 'séétibn 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 regulation simply provides that in the many situations where financing or credit transactions do not involve the disbursement of any loan proceeds but do involve the extension of credit and interest charges or expenses therefor, the interest expenses are to be allocated .between the taxpayer’s business and personal activity based on the nature of the particular underlying activity giving rise to the extension of credit.
Under section 1.163-8T(c)(3)(ii), Temporary Income Tax Regs., supra, even though no loan proceeds were disbursed to petitioners by the Government, credit was extended to petitioners by the Government, 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 petitioners’ business, under section 1.163-8T(c)(3)(ii), Temporary Income Tax Regs., supra, the interest expense in question should be treated as allocable to petitioners’ business and as deductible under the statute.
Concurrence Opinion
Laro,- J.,-
Before the Tax Reform Act of 1986 (TRA), Pub. L. 99 — 514, 100 Stat. 2085, this and other courts allowed an individual to deduct interest on his or her income tax liability as a business expense under sections 62(a)(1) and 162(a), see, e.g., Standing v. Commissioner,
The Commissioner disagrees with the courts’ view. According to her, interest on an income tax liability attributable to a business is not deductible by an individual in computing AGI. In Rev. Rui. 58-142, 1958-
The Commissioner’s ruling in Rev. Rui. 58-142, supra, with respect to AGI, was based on former section 1.62-l(d), Proposed Income Tax Regs., 21 Fed. Reg. 8403 (Nov. 2, 1956), which provided:
To be deductible for the purposes of determining adjusted gross income, expenses must be those directly, and not those merely remotely, connected with the conduct of a trade or business. For example, taxes are deductible in arriving at adjusted gross income only if they constitute expenditures directly attributable to a trade or business or to property from which rents or royalties are derived. Thus, property taxes paid or incurred on real property used in a trade or business are deductible, but State taxes on net income are not deductible even though the taxpayer’s income is derived from the conduct of a trade or business.
The Commissioner’s ruling with respect to the NOL was primarily based on this Court’s decisions in Maxcy v. Commissioner,
In Rev. Rui. 70-40, 1970-
Subsequently, in Polk v. Commissioner, supra at 414-415, this Court held that interest on an income tax deficiency stemming from the Commissioner’s revaluation of the taxpayer’s livestock inventory was deductible as a business expense for purposes of computing an NOL. In so holding, this Court stated that the case was “clearly controlled” by Standing. Polk v. Commissioner, supra at 415. We also stated that the deficiency interest was deductible as a business expense
The Opinion in that case includes the following (p. 527): “The burden is on * * * [the taxpayer] to demonstrate the clear allowability of the deduction. This burden he has failed to carry.”
In the instant case, however, as in Standing, supra, * * * [the taxpayer’s] burden is clearly and fully met. We have carefully reexamined the problem, and we see no occasion to depart from the reasoning and principles established by the Court of Appeals for the Fourth Circuit, and by this Court, in Standing.
[Polk v. Commissioner, supra at 415.]
On appeal, the Court of Appeals for the Tenth Circuit agreed that these amounts were deductible. Commissioner v. Polk,
Shortly thereafter, this Court reached a result consistent with Polk and Standing in our Court-reviewed opinion in Reise v. Commissioner,
It is with this backdrop that I proceed to address the validity of the regulations at hand. The Commissioner claims that she validly prescribed section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., 52 Fed. Reg. 48409 (Dec. 22, 1987), based on the legislative history of section 163(h) and the Staff of Joint Comm, on Taxation, General Explanation of the Tax Reform Act of 1986, át 266 (J. Comm. Print 1987) (the 1986 Bluebook).
First, there is no reason to resort to the legislative history of section 163(h). A statute speaks for itself, and its legislative history should be sought,to embellish the text only when
In the case of a taxpayer other than a corporation, no deduction shall be allowed under this chaptér for personal interest paid or accrued during the taxable year.
* * * the term “personal interest” means any interest * * * other than—
* * * interest paid or accrued on indebtedness properly allocable to a trade or business * * *
[Sec. 163(h)(1) and (2)(A).]
This text is not ambiguous. Interest paid on a debt that is properly allocable to a trade or business is not personal interest under section 163(h). Given the clarity of this text, the beginning and end of our inquiry should be the statutory text, and we should apply the plain and common meaning of the statute.
canons of construction are no more than rules of thumb that help courts, determine the meaning of legislation, and in interpreting a statute a court should always turn first to one, cardinal canon before all others. We have stated time and time again that courts must presume that a legislature says in a statute what it means and means in a statute what it says there. * * * When the words of a statute are unambiguous, then, this first canon is also the last: judicial inquiry is complete. [Connecticut Natl. Bank v. Germain,503 U.S. 249 , 253-254 (1992); citations and quotation marks omitted.]
My conclusion is not changed by the broad interpretation given to section 163(h)(2) by the Joint Committee in the 1986 Bluebook. I give little weight to this broad interpretation. Flood v. United States,
The nuts and bolts of this case is that the Commissioner continues to disagree with the pre-TRA judicial view that an individual engaged in a trade or business may deduct from gross income the amount of interest on a Federal income tax liability that is attributable to his or her business. Thus, the Commissioner prescribed her position into section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., supra, under the guise of the tra’s amendments to section 163. Section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., supra, is inconsistent with section 163(h). The nondeductibility of personal interest does not apply to interest on a Federal income tax liability that is properly allocable to a trade or business. Sec. 163(h)(2)(A). Interest on a Federal income tax liability that is properly allocable to a trade or business is deductible under section 162(a) if the incurrence of the interest is ordinary and necessary to the trade or business. If the Congress had intended to disallow any deduction for deficiency interest that was an ordinary and necessary business expense under section 162(a), the Congress would have said so. Instead, the Congress clearly stated that personal interest does not include “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)”. Sec. 165(h)(2)(A). Because the Commissioner’s prescription of section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., supra, is inconsistent with the statute (and is not within the “legislature’s revealed design” for the TRA’s amendments to section 163, NationsBank v. Variable Annuity Life Ins. Co.,
Whether the interest was deductible as a business expense or a nonbusiness itemized deduction depended.on the. character of the income tax liability.
At the same time, the Commissioner reaffirmed her view that these expenses were not deductible in computing AGI. The Commissioner explained her inconsistency in these two views by noting that the legislative history of sec. 172(d)(4) contained no language comparable to the language In the legislative history of former sec. 62(a)(1), which stated that expenses deductible in arriving at AGI must be “directly incurred” (emphasis added) in carrying on a trade or business, and that State income taxes are not directly incurred. Rev. Rui. 70-40, 1970-
Sec. 22(n)(l) of the 1939 Code provides that'AGI equals gross income less “deductions allowed by section 23 which are attributable to a trade or business carried on by the taxpayer, if such trade or business does not consist of the performance of services by the taxpayer as an employee”. Sec. 23(a)(1) of the 1939 Code allows for the deduction of “All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business”. The language of secs. 22(n)(l) and 23(a)(1) is essentially verbatim with the language of secs. 62(a)(1) and 162(a), respectively.
The text of sec. 122(d)(5) of the 1939 Code is virtually identical to the text of sec. 172(d)(4).
The Joint Committee on Taxation for the 100th Congress (Joint Committee) consisted of five Senators and five members of the House of Representatives. The 1986 Bluebook, at II. The 1986 Bluebook was prepared by the Staff of the Joint Committee, in consultation with the staffs of the House Ways and Means Committee and the Senate Finance Committee. Letter from David H. Brockway, Chief of Staff, to the Hon. Dan Rostenkowski, Chairman, and the Hon. Lloyd Bentsen, Vice-Chairman. Id. at XVII. According to 1 Mertens, Law of Federal Income Taxation, sec. 3.20, at 31 (1994):
The purpose of the Blue Book is to provide, in one volume, a compilation of the legislative history of a piece of tax legislation. While the document is most helpful as a handy reference volume it also gives some guidance. Where the Blue Book’s explanation differs from that in a conference report it may serve to alert the reader that a technical correction is needed to reconcile the views. [Emphasis added.]
Indeed, the Commissioner has done just that with respect to the term “properly allocable”. The Commissioner prescribed sec. 1.163-8T, Temporary Income Tax Regs., to determine the amount of interest that is properly allocable to a trade or business. Sec. 1.163-9T(b)(l)(i), Temporary Income Tax Regs., 52 Fed. Reg. 48409 (Dec. 22, 1987). Sec. 1.163-8T(a)(3), (4)(i)(A), (b)(7), and (c)(3)(ii), Temporary Income Tax Regs., 52 Fed. Reg. 24999-25001 (July 2, 1987), provides that interest is properly alloGable to a trade or business to the extent that the proceeds of the underlying debt are traceable to an “expenditure i: * * in connection with the conduct of any trade or business”. But for sec. 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., 52 Fed. Reg. 48409 (Dec. 22, 1987), there should be no dispute that petitioners may deduct their deficiency interest because the interest is connected to the Federal income taxes that they must pay on their business income. Fort Howard Corp. & Subs. v. Commissioner,
I note that the Commissioner’s position in the instant case is inconsistent with a recent administrative position of hers. In Rev. Rul. 92-29, 1992-
Dissenting Opinion
dissenting: I disagree with the majority for reasons already well stated by the Court of Appeals for the Eighth Circuit in Miller v. United States,
First, I do not believe that the conference committee’s use of the word “generally” supports the majority’s reasoning. The conference committee report states: “Personal interest also generally includes interest on tax deficiencies”. H. Conf. Rept. 99-841, at 11-154 (1986), 1986-3 C.B. (Vol. 4) 1, 154. The majority seizes upon the word “generally” and reasons that Congress could not have intended to declare that all interest on “income” tax deficiencies is personal interest. However, in the conference committee report, the word “generally” modifies “tax deficiencies”, not “income tax deficiencies”. The term “tax deficiencies”, which also includes estate and gift tax deficiencies, is obviously broader than the term “income tax deficiencies”. Congress statutorily excluded some interest on tax deficiencies from the “personal interest” definition by specifically providing in section 163(h)(2)(E) that interest on estate taxes imposed by section 2001 is, in
Second, the body of case law relied upon by the majority found its genesis to a large extent in the failure of section 22(n) of the Internal Revenue Code of 1939 to directly address whether an individual was entitled to deduct interest on an income tax deficiency attributable to a trade or busir ness and the lack of legislative history and regulations on the subject. See Commissioner v. Standing,
In reaching its conclusion [in Standing], the court pointed out that neither the committee reports nor the regulations with respect to section 22(n)(l) specifically mentioned interest on tax deficiencies with respect to business income or legal expenses incurred in contesting such deficiencies. The same cannot be said, of course, with respect to State income taxes. As pointed out hereinabove, both the committee reports and the regulations specifically state that State income taxes, even though incurred as a result of business profits, are not deductible in computing adjusted gross income.
Like the situation presented to us in Tanner, both the legislative history and contemporaneous regulations support a holding that the interest paid on petitioners’ late income tax payment constitutes nondeductible “personal interest”.
Third, the majority expresses concern that the regulation in issue “discriminates against the individual who operates his or her business as a proprietorship instead of in corporate form where the limitations on the deduction of ‘personal interest’ would not apply.” See majority op. pp. 40-41. The short answer to this is that Congress, when it enacted section 163(h) disallowing personal interest, excluded corporate
An individual’s income tax liability is based on an amalgamation of income derived from all sources and deductions, credits, exclusions, exemptions, filing status, income bracket, and other considerations. Income from an unincorporated business is merely one of the many components necessary to determine what is still in essence a tax on an individual’s personal accessions to wealth from whatever source derived. See James v. United States,
APPENDIX
JEAN D. TRUE; H.A. TRUE, JR.; H.A. TRUE, III;
KAREN S. TRUE; DIEMER D. TRUE; SUSAN L. TRUE;
DAVID L. TRUE; MELANIE A. TRUE, PLAINTIFFS—
APPELLANTS v. U.S., DEFENDANT-APPELLEE.
U.S. Court of Appeals, Tenth Circuit, No. 93-8092, Aug. 26, 1994. District Court, 72 AFTR 2d 93-5660, affirmed. Decision for Govt.
MOORE, Circuit Judge:
Order and Judgment
Before MOORE, SETH, and TACHA, Circuit Judges:
Plaintiffs in these consolidated cases appeal from a summary judgment motion in favor of the government.
H.A. True, Jr.,
The district court determined the tax code classifies the 1986 interest payments as a personal rather than a business expense. The court asserted a sole proprietor could deduct this interest as a personal business expense. However, unlike the situation with sole proprietorships, partnerships and S corporations are separate entities from partners and shareholders for the purpose of characterizing income and deducting business expenses. Therefore, if the interest payments- are a business expense, the deduction would occur on the partnership or corporate level before the determination of the distributive shares of the businesses’ incomes.
Plaintiffs argue they have no alternative minimum tax liability. They claim the interest payments represent a business expense because the complexity of income tax laws creates legitimate disputes about the amount of tax owed, and, thus, deficiency interest is an ordinary and necessary expense of operating a business. They argue when -deficiency interest is deducted as a business expense from gross income to arrive at adjusted gross income, the starting point for calculating alternative minimum tax, no alternative minimum tax liability occurs. To support their contention the interest constitutes a business expense, plaintiffs argue a sole proprietor could deduct this interest as a business expense; therefore, equity demands partners and S corporation shareholders receive the same tax treatment. Pointing to cases involving legal fees and employee benefits, plaintiffs assert partners may deduct personally-paid partnership-related expenses as business expenses. Furthermore, because partnerships and S corporations pass their tax liability onto their owners rather than pay taxes themselves, plaintiffs point out these entities cannot account for deficiency interest in determining distributable income. The partners and shareholders, therefore, may deduct deficiency interest attributable to the entities as a business expense on their individual returns.
The government argues the interest payments are a personal rather than a business expense. Partnerships and S corporations are entities separate from their owners for the purposes of calculating income and deductions. Therefore, if the 1986 interest represents a business expense, the expense and deduction belong to the partnership or corporate entities. However, because partnerships and S corporations have no federal income tax liability, they bear no responsibility for interest on unpaid taxes and, thus, they cannot consider penalty interest a business expense. The government adds, contrary to the district court’s conclusion, sole proprietors generally cannot deduct deficiency interest as a business expense because deficiency interest does not constitute an ordinary and necessary expense of operating a business.
We review de novo a grant of summary judgment. Phillips Petroleum Co. v. Lujan,
The alternative minimum tax imposes additional income táxes on individual taxpayers for whom a portion of their alternative minimum taxable income exceeds their regular tax liability. I.R.C. section 55(a).
The deficiency interest paid by- plaintiffs exceeded the amount they were entitled to deduct as qualified interest; thus, plaintiffs may only fully deduct the deficiency interest if it constitutes a business expense. We conclude the penalty interest represents a personal expense because the obligation to pay taxes is personal to plaintiffs.
With a few exceptions inapplicable to this controversy, partnerships and S corporations calculate and report their taxable income in the same manner as individual taxpayers, but these entities do not incur tax liability.
Plaintiffs, having chosen to operate their businesses as partnerships and S corporations, bear personal responsibility for tax deficiencies and the associated interest attributable to their businesses. As a result, they cannot deduct the penalty interest they paid in 1986 from gross income as a business expense pursuant to I.R.C. section 62(1). Plaintiffs, therefore, are not entitled to a refund of their alternative minimum tax. The judgment of the district court is AFFIRMED.
A copy of the unpublished opinion of the Court of Appeals for the Tenth Circuit in True v. United States that appears at 74 AFTR 2d 94-6253, is appended. Although citation of unpublished opinions of the Court of-Appeals for the Tenth Circuit remains unfavored, unpublished opinions may now be cited if the opinion has persuasive value on a material issue, and a copy is attached to the citing document. See General Order of Nov. 29, 1993, suspending 10th Cir. Rule 36.3.
This order and judgment is not binding precedent, except under the doctrines of law of the case, res judicata, and collateral estoppel. The court generally disfavors the citation of orders and judgments; nevertheless, an order and judgment may be cited under the terms and conditions of the court’s General Order filed Nov. 29, 1993.
Mr. True died during the course of this litigation. As personal representatives of his estate, his wife and the three of his children involved in this case have been substituted as parties for Mr. True.
The court noted the irony that the corporations and partnerships cannot deduct the 1986 interest payments because they have no obligation to pay taxes or interest on tax deficiencies.
The government goes on to contend an individual taxpayer can never deduct deficiency interest from gross income as a business expense.
Citations to the tax code refer to the amended provisions of the 1954 code effective in 1986.
Certain circumstances not relevant here will result in tax liability for an S corporation. See I.R.C. section 1363(a).
The Supreme Court has noted a partnership is a separate entity from its partners for the purpose of calculating and reporting its income but has no bearing on the partners’ individual tax liability for the partnership’s income. United States v. Basye,
In advocating their opposing arguments, plaintiffs and the government have suggested Commissioner v. Polk,
We believe, as did the panel presiding in Polk, that Polk settled a unique controversy. The parties have not presented any facts nor can we imagine another situation in which penalty interest would be an ordinary and necessary expense of operating a trade or business. Furthermore, Polk has no relevance here because it involved a taxpayer operating a sole proprietorship rather than a partnership or S corporation.
This liability is in addition to, and separate from, the direct liability of a corporate employer. Section 6672 is not in issue in this case.
Dissenting Opinion
dissenting:
I. Introduction
Section 163(h)(2)(A) exempts from the category of personal interest (which is nondeductible for individuals): “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)”.
The majority finds that a reasonable interpretation of that exemption includes the interest here in question. The majority holds that, if the tracing rules of section 1.163-8T, Temporary Income Tax Regs., require a contrary conclusion, then, to that extent, the tracing rules are invalid. If the tracing rules of section 1.163-8T, Temporary Income Tax Regs., 52
In so holding, the majority departs from the Supreme Court’s teachings in Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc.,
II. In the Absence of Regulations
I agree that, in the absence of temporary regulations, a reasonable interpretation of section 163(h)(2)(A) would include the interest here in question. First, it is reasonable to treat a deficiency in tax as giving rise to an indebtedness to the Government in the amount of the deficiency and to treat the interest allocable to the deficiency as interest paid or accrued on that indebtedness. See discussion infra sec. III.C.2.a. Second, any tax paid with respect to income is an expense associated with that income, at least in the sense that the income is causal of the expense. Interest on a deficiency in income tax (hereafter, deficiency interest), or interest on a borrowing to pay an income tax, likewise is an expense associated with the income subject to tax. With respect to both süch tax and such interest, only the after-tax-after-interest amount is available for consumption or as an addition to savings. Whether such aftercosts themselves constitute consumption is the real question here at issue. In the absence of any exposition in the statute of the term “properly allocable”, and in light of Congress’ history (explained infra) of treating Federal income taxes as not a consumption expense, I think that it is reasonable to conclude that deficiency interest attributable to nonemployee trade or business income (hereafter, simply trade or business income) is properly allocable to such income and, thus, is not personal interest. However, because Congress changed its mind, and now treats Federal income taxes as a consumption expense
III. Sections 1.163-8T and 1.163-9T, Temporary Income Tax Regs., Are Valid
A. Standard of Review
The majority sets forth the proper standard for reviewing a regulation. Majority op. pp. 38-39. The majority, I submit, misapplies that standard.
The narrow question before us is whether section 1.163-9T(b)(2)(i)(A), Temporary Income Tax “(Regs., supra, is valid, insofar as it applies to the facts of the instant case. Therefore, in order to properly decide that issue, we must, in accordance with the teaching of NationsBank v. Variable Annuity Life Ins. Co., supra, answer two questions. First, is section 163(h) silent or ambiguous with respect to either: (a) The standard for determining which items of indebtedness are “properly allocable” to a trade or business, or (b) “the specific issue at hand”, which is whether interest paid with respect to an individual’s Federal income tax liability is deductible? NationsBank v. Variable Annuity Life Ins. Co.,
In this case, my answer to each of the above questions is yes. Therefore, . section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., supra, is valid and must be given “controlling weight”. NationsBank v. Variable Annuity Life Ins. Co.,
Section 163(h) was added to the Code by the Tax Reform Act of 1986, Pub. L. 99-514, sec. 511(b), 100 Stat. 2085, 2246. In the case of individual taxpayers, section 163(h)(1) disallows a deduction for all personal interest paid or accrued during the taxable year. Section 163(h)(2) then provides that all interest is personal interest unless that interest falls into one of the five exceptions listed in paragraph (2). The only relevant exception for our purposes is contained in subpara-graph (A), which provides that the term “personal interest” does not include “interest paid or accrued on indebtedness properly allocable to a trade or business”. Sec. 163(h)(2)(A) (emphasis added).
The term “properly allocable” is ambiguous, because Congress has not indicated the method by which, or the assumptions under which, taxpayers, the Service, and the courts are to decide whether a particular indebtedness is “properly allocable” to a trade or business. Clearly, there is more than one way to allocate interest. Compare, for example, the asset-based apportionment method found in section 265(b)(2) with the tracing method outlined in section 1.163-8T(a)(3), Temporary Income Tax Regs., 52 Fed. Reg. 24999 (July 2, 1987). More importantly, the statute is silent with respect to the specific issue at hand — whether interest with respect to an individual’s Federal income tax liability is deductible. For the foregoing reasons, the first requirement of the NationsBank teaching is satisfied.
C. The Temporary Regulations Promulgated Under Section 163(h) Are Permissible Agency, Interpretations
1. Section 1.163-8T, Temporary Income Tax Regs., Is Valid
In order to give meaning to the term “properly allocable”, and thereby implement section 163(h)(2)(A), the Secretary has promulgated section 1.163-8T, Temporary Income Tax Regs., supra. The focus of the temporary regulations is on the relationship between an individual’s debts and her activities. That is because, under section 163(h)(2)(A), interest piggybacks on indebtedness, and it is the allocation of a particular indebtedness to a trade or business that establishes
The tracing approach selected by the Secretary may at times appear wooden and mechanical. Thus, an individual with $100 in savings and two obligations, one to pay $100 to her employees and one to pay $100 towards her vacation in Spain, can dictate the tax result of borrowing $100 to pay one of those obligations by deciding which one to pay with the borrowed $100. Nevertheless, the tracing approach leaves little room for ambiguity as to whether an indebtedness is business related, at least in the case of debt-financed expenditures that are clearly business or personal.
The legislative history of section 163(h) indicates a congressional purpose to end the deduction for interest on debt incurred to fund consumption, or personal, expenditures. S. Rept. 99-313, at 804 (1985), 1986-3 C.B. (Vol. 3) 1, 804; H. Conf. Rept. 99-841, at 11-154 (1986), 1986-3 C.B. (Vol. 4) 1, 154. By requiring the manner in which borrowed funds are expended to determine whether the interest on those funds is deductible, the Secretary has defined the term “properly allocable” in a way that is “reasonable in light of the legislature’s revealed design”. NationsBank v. Variable
2. Section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., Also Is Valid
a. Are Petitioners’ Tax Payments Made in Connection With Their Trade or Business?
The majority invalidates section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., supra. Subdivision (A) of section 1.163-9T(b)(2)(i), Temporary Income Tax Regs., supra, provides that personal interest includes interest:
Paid on underpayments of individual Federal, State or local income taxes and on indebtedness used to pay such taxes (within the meaning of§1.168^-8T), regardless of the source of the income generating the tax liability;
The obligation to pay deficiency interest arises if a taxpayer fails to make a timely payment of her tax liability, as finally determined. See sec. 6601(a). For there to be any possibility that deficiency interest is deductible under section 163(h)(2)(A), we must assume that the underpayment giving rise to deficiency interest is an indebtedness of the taxpayer. See sec. 163(h)(2)(A). Moreover, the tracing rules of section 1.163-8T, Temporary Income Tax Regs., supra, require the taxpayer to identify (1) the proceeds resulting from any indebtedness and (2) the disbursement of those proceeds to specific expenditures. Sec. 1.163-8T(a)(3), Temporary Income Tax Regs., supra. Only if the specific expenditures so identified are business expenditures within the meaning of section 1.163-8T(b)(7), Temporary Income Tax; Regs., supra, would the related deficiency interest be deductible under section 163(h)(2)(A). Sec. 1.163-8T(a)(4)(i)(A), Temporary Income Tax Regs., 52 Fed. Reg. 25000 (July 2, 1987). Of course, an underpayment of income tax does not give rise to identifiable proceeds received from the Government. The temporary regulations address the situation of unidentifiable debt proceeds under the heading “Debt assumptions not involving cash disbursements.” Section 1.163-8T(c)(3)(ii), Temporary Income Tax Regs., supra, provides:
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.]
An individual making an underpayment of tax is thus treated as if she incurred an indebtedness equal to the amount of such underpayment and used the proceeds of the indebtedness to eliminate the underpayment. Such an individual is treated the same as an individual who avoided any underpayment by borrowing from a third party the funds necessary to make a full payment. Indeed, it is difficult to see a tracing system distinguishing between those two cases without getting into the type of apportionment that tracing
The real question, of course, is whether interest on borrowed funds expended to discharge an individual’s income tax liability is personal interest within the ■meáhíng of sec-, tion 163(h)(2)(A). It is not, on the facts of our case, if petitioners’ payments of their 1989 and 1990 Federal income taxes are expenditures made in connection with the conduct of théir unincorporated business. See secs. 1.163— 8T(a)(4)(i)(A), (b)(7), 1.163-9T(b)(l)(i), Temporary Income Tax Regs., supra.
b. A Conclusion Either Way Is Reasonable
Prior to the War Revenue Act, ch. 63, 40 Stat. 300 (1917), Federal income taxes were deductible. See, e.g., sec. 5(a) of the Revenue Act of 1916, ch. 463, 39 Stat. 756, 759; Seidman, Seidman’s Legislative History of Federal Income Tax Laws 1938-1861, at 943-944 (1938) (re: 1917 Act). Before 1917, Federal income taxes allocable to a business reasonably could be considered a cost of that business, and both any deficiency interest allocable to such taxes and any interest on indebtedness incurred to pay such taxes likewise could be considered a cost of business. Congress, however, has not allowed a deduction for Federal income taxes since such deduction was eliminated by the War Revenue Act, ch. 63, sec. 1201(1), 40 Stat. 300, 330 (1917).
Congress’ present treatment of Federal income taxes is reasonable. Plainly, an expenditure made for Federal income taxes is not an expenditure made in consideration of any specific property or service received by the taxpayer. The payment of Federal income taxes is a civic duty, not a matter
If Federal income taxes constitute consumption, and not a trade, business, or investment expense, then, under a tracing rule, such as the rule of section 1.163-8T, Temporary Income Tax Regs., supra, the inescapable, and reasonable, conclusion is that any deficiency interest, or interest on a borrowing to pay income taxes, is personal interest. The taxpayer’s purpose for borrowing the money, or the reason the deficiency arose (e.g., “My accountant made a mistake!”) simply is irrelevant. Though that approach may appear wooden, it is unambiguous.
The rule found infection 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., supra, and invalidated by the majority, is nothing more than a fact-specific application of section 1.163-8T, Temporary Income Tax Regs., supra. It is specific to the fact that Federal taxes are reasonably considered a nondeductible, personal expenditure. Section 1.163-8T, Temporary Income Tax Regs., supra, is a valid regulation and must be given “controlling weight”. NationsBank v. Variable Annuity Life Ins. Co.,
D. The Majority’s Other Points
The above analysis is sufficient to convince me that the majority has improperly invalidated portions of the temporary regulations. Nonetheless, I will address certain of the majority’s other points.
1. The Legislative History of Section 163(h)
In reaching its holding, the majority relies in part on the scant legislative history behind section 163(h). The majority’s
The majority’s conclusion does not necessarily follow from the language in the committee report. First, whether or not the term “deficiency” has an established meaning for purposes of statutory construction, I am unconvinced that we ought to ascribe to the drafters of a conference report the same care that is supposed in the drafting of statutes. Moreover, there is at least one instance consistent with the temporary regulations in which deficiency interest paid by an individual is not personal interest. Prior to the disallowance of a deduction for personal interest, courts held that a transferee under section 6901 (tax liability resulting from transferred assets) could deduct interest on an income tax deficiency that accrued after the transfer of the assets to which the tax related. Haden Co. v. Commissioner,
2. And What About Reise, Polk, and Standing?
In reaching its conclusion that section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., supra, is invalid, the majority relies on Reise v. Commissioner, supra; Polk v. Commissioner, supra; and Standing v. Commissioner, supra, for the proposition that certain deficiency interest has been interpreted to constitute a trade or business expense for various purposes, e.g., for applying section 62(a)(1) in determining adjusted gross income. The majority apparently believes that those interpretations have been woven into the fabric of the Code in such a way that only a specific act of Congress could remove them. Majority op. p. 43. In the context in which those interpretations were made (e.g., a question arising under what is now section 62(a)(1), when the distinction between business and personal interest was otherwise unimportant), perhaps the majority has a point. The majority’s focus, I submit, is too narrow. The proper allocation of indebtedness for purposes of section 163(h)(2)(A) is not limited to indebtedness giving rise to deficiency interest. Congress left it to the Secretary to interpret the statutory command — “properly allocable” — for all categories of debt. The tracing method of interest allocation settled on by the Secretary is applicable across the board, not just in the case of an indebtedness arising on account of an underpayment. Indeed, it is difficult to discern a coherent scheme of interest allocation from the three cited cases. It would be a very small tail wagging a very large dog if we were to let those cases determine what is a proper method of interest allocation for all classifications of indebtedness.
3. Discrimination as to Form of Doing Business
The majority postulates that (1) the expenditure method of allocation found in section 1.163-8T, Temporary Income Tax Regs., supra, “excludes an entire category of interest expense
As a preliminary matter, the majority has not identified the business connection here. The majority relies on cases whose reasoning it concedes is confusing. Majority op. p. 37. Moreover, the majority has warned that, to satisfy section 163(h)(2)(A), it is insufficient simply to show that the cause of the deficiency interest is an underpayment of income tax attributable to a trade or business. Majority op. p. 47. The majority has not specified the principles to be used in deciding future cases. Assuming that there are such principles, however, the majority does not explain why Congress may not discriminate between individuals doing business as proprietorships and in corporate form. Granted, section 163(h) applies only to individuals. Congress has been of two minds as to the deductibility of Federal income taxes, and perhaps the distinction reflects some residual ambiguity. Perhaps Congress views corporate deficiency interest as properly an investment expense of shareholders. We do not know. In any event, the majority has not convinced me that the inconsistency is unconstitutional.
E. Conclusion
Again, the temporary regulations in question, sections 1.163-8T and 1.163-9T, Temporary Income Tax Regs., supra, resolve ambiguities and fill gaps in the statute in a permissible fashion, and for that ' reason, must be upheld. NationsBank v. Variable Annuity Life Ins. Co.,
I would hold for respondent.
See sec. 275(a)(1) (no deduction for Federal income taxes); Seidman, Seidman’s Legislative History of Federal Income Tax Laws 1938-1861, at 943-944 (1938) (re: 1917 Act). Sec. 275(a)(1) was added to the Code by section 207 of the Revenue Act of 1964, Pub. L. 88-272, 78 Stat. 19, 40. Sec. 275(a)(1) merely restates preexisting law (which was contained in sec. 164(b)(1)). Both the Committee on Ways and Means and the Committee on Finance had the following to say about preexisting law: “Under present law. certain taxes, largely Federal taxes, may not be deducted in any case either as taxes, or as business expe?ises or as expenses incurred in the production of income.” (Emphasis added.) H. Rept. 749, 88th Cong., 1st Sess. (1963), 1964-1 C.B. (Part 2) 125, 174 (that report accompanied H.R. 8363, 88th Cong., 1st. Sess., which was enacted as the Revenue Act of 1964. Pub. L. 88-272, 78 Stat. ,19); S. Rept. 830, 88th Cong., 2d Sess. (1964), 1964-1 C.B. (Part 2) 505, 560 (similar).