United States Court of Appeals,
Fifth Circuit.
No. 92-4954.
George S. NALLE, III, and Carole Nalle, Petitioners-Appellants,
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
Charles A. BETTS and Sylvia I. Betts, Petitioners-Appellants,
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
Aug. 16, 1993.
Appeal from a Decision of the United States Tax Court.
Before SMITH, DUHÉ, and WIENER, Circuit Judges.
JERRY E. SMITH, Circuit Judge:
George and Carole Nalle and Charles and Sylvia Betts (collectively, the "taxpayers") appeal
a decision of the Tax Court upholding the assessment of an income tax deficiency against them by
the Commissioner of Internal Revenue (the "Commissioner"). Because we find the treasury
regulation pursuant to which the Commissioner assessed the deficiency to be an invalid interpretation
of the statute, we reverse.
I.
George Nalle ("Nalle") o wns a fifty-percent interest in the Heritage Square Joint Venture,
which, between 1982 and 1984, identified eight buildings in and around Austin that were appropriate
for rehabilitation and relocation, five of which were slated for demolition in order to accommodate
the expanding campus of the University of Texas at Austin. All eight houses were purchased and
moved to the Heritage Square office subdivision in suburban Rollingwood, where they were restored
to substantially the same style and condition as originally constructed.1
1
The three houses not removed to make way for expansion of the campus were found in other
parts of Texas and were moved, variously, 20, 70, and 80 miles to Heritage Square.
Because each house was more than forty years old on the date rehabilitative work
commenced, Nalle claimed an investment tax credit for over $500,000 of the rehabilitation performed
in tax years 1983-86, pursuant to section 48(g) of the Internal Revenue Code (the "Code"), 26 U.S.C.
§ 48(g). Heritage did not claim the tax credit for expenditures incurred in refurbishing one of its
properties, the Julia Harris house, but passed the credit on to the purchasers, appellants Charles and
Sylvia Betts, who reported a credit for $35,934 on their joint 1983 federal tax return, $14,322 of
which was carried back to their 1980 return.
On June 28, 1985, the Internal Revenue Service ("IRS") published proposed treasury
regulation 26 C.F.R. § 1.48-12, subsection (b)(5) of which set forth a requirement that "qualified
rehabilitated buildings" such as were eligible for the section 48(g) tax credit not have been relocated
within forty years of the date on which rehabilitation was begun. The regulation was adopted in final
form on October 7, 1988, and was applied retroactively to rehabilitation expenditures incurred after
December 31, 1981. The IRS audited the taxpayers' returns for 1983-86, and on June 9, 1989, issued
a statutory notice of deficiency disallowing the credits.
In the Tax Court, it was stipulated that the houses qualified for the rehabilitation tax credit
but for the exclusion of relocated properties contained in section 1.48-12(b)(5). The taxpayers
argued that the new regulation was invalid because it added a requirement to the statute that had not
previously existed, yet was passed pursuant to the Commissioner's interpretive authority under 26
U.S.C. § 7805(a) and not pursuant to any legislative authority conferred by Congress with respect
to section 48(g). The Commissioner countered that the regulation was not inconsistent with the
statutory text and vindicated a central policy goal of the original legislation (as revealed by the
legislative history)—the revitalization of decayed and deteriorating areas. The Tax Court ruled in
favor of the Commissioner, citing the support for his position contained in the legislative history of
the tax credit.
II.
An interpretive regulation promulgated pursuant to the Commissioner's authority under
section 7805(a) is generally "entitled to substantial weight." Lykes v. United States, 343 U.S. 118,
127, 72 S.Ct. 585, 590, 96 L.Ed. 791 (1952).2 The Supreme Court has provided us with substantial
guidance in reviewing the propriety of such regulations:
In determining whether a particular regulat ion carries out the congressional mandate in a
proper manner, we look to see whether the regulation harmonizes with the plain language of
the statute, its origin, and its purpose. A regulation may have particular force if it is a
substantially contemporaneous construction of the statute by those presumed to have been
aware of congressional intent. If the regulation dates from a later period, the manner in which
it evolved merits inquiry. Other relevant considerations are the length of time the regulation
has been in effect, the reliance placed on it, the consistency of the Commissioner's
interpretation, and the degree of scrutiny Congress has devoted to the regulation during
subsequent re-enactments of the statute.
National Muffler Dealers' Ass'n v. United States, 440 U.S. 472, 477, 99 S.Ct. 1304, 1307, 59
L.Ed.2d 519 (1979).
III.
The dispute here is the interpretation of one subsection of the Code provided by a regulation
issued more than five years after the subsection it purports to interpret. The key subsection is section
48(g)(1)(A), which, as it existed for the tax years in question,3 set out a three-part test governing
eligibility for the rehabilitative investment tax credit:
(A) In general.—The term "qualified rehabilitated building" means any building (and
its structural components)—
(i) which has been rehabilitated,
(ii) which was placed in service before the beginning of the rehabilitation, and
(iii) 75 percent or more of the existing external walls of which are retained in
place as external walls in the rehabilitation process.
Only the last of these requirements, referred to by the parties as the "external wall test,"
concerns us. It is the taxpayers' contention that the external wall test means more or less what it
says—that a building may qualify for the tax credit only if its structure remains substantially the same
2
Section 7805(a) provides, in pertinent part, that "the Secretary [of the Treasury] shall
prescribe all needful rules and regulations for the enforcement of this title, including all rules and
regulations as may be necessary by reason of any alteration of law in relation to internal revenue."
26 U.S.C. § 7805(a) (Supp.1993). Although the section expressly refers to the Treasury
Secretary, the Commissioner is an authorized delegate of the Secretary. See 26 C.F.R. §
601.601(a)(1).
3
Section 48 was redesignated as section 47 by the Omnibus Budget Reconciliation Act of
1990, Pub.L. 101-508, § 11813, 104 Stat. 1388—536 et seq.
as before rehabilitation. The test, they say, simply serves to distinguish new construction, for which
no credit is allowed, from rehabilitation, for which the credit is available. The Commissioner, relying
largely upon a deferential review of agency determinations, argues that section 1.48-12(b)(5), which
divines in the external wall test a restriction on relocation of non-historic rehabilitated buildings, is
not inconsistent with the origin and purpose of the statute.4
As previously noted, the Tax Court upheld the regulation on the basis that it "harmonized"
with congressional intent, at least as revealed by selected passages from the credit's legislative history:
The legislative history of section 48 reveals that it is not, as petitioners contend, solely
a device to promote the rehabilitation of older buildings. From its inception, the tax credit
for rehabilitation expenditures was intended to provide an economic stimulus for those areas
susceptible to economic decline and abandonment, particularly the "central cities and
neighborhoods of all communities."
Nalle v. Commissioner, 99 T.C. 187, 195, 1992 WL 184967 (quoting H.R.REP. No. 1445, 95th
Cong., 2d Sess. 86, reprinted in 1978 U.S.C.C.A.N. 7046, 7121).
We are mindful, at the outset, of Justice Scalia's recent reference to the use of legislative
history as oftentimes being "the equivalent of entering a crowded cocktail party and looking over the
heads of the guests for one's friends." Conroy v. Aniskoff, --- U.S. ----, ----, 113 S.Ct. 1562, 1567,
123 L.Ed.2d 229 (1993) (Scalia, J., concurring). Our reading of the scant legislative history
surrounding the 1978 adoption and 1981 amendment of section 48(g) suggests that, in this case, the
Tax Court picked its few friends from an otherwise indifferent crowd.
Foremost among those friends is the above-quoted House report on the Revenue Act of 1978,
which first extended the investment tax credit—previously restricted to equipment and machinery—to
non-historical, non-residential buildings. According to the report, among the reasons for the change
4
Section 1.48-12(b)(5) states, in part, as follows:
Location at which the rehabilitation occurs. A building, other than a
certified historic structure ... is not a qualified rehabilitation building unless it has
been located where it is rehabilitated for the thirty-year period immediately
preceding the date physical work on the rehabilitation began in the case of a "30-
year building" or the forty-year period immediately preceding the date physical
work on the rehabilitation began in the case of a "40-year building."
26 C.F.R. § 1.48-12(b)(5) (1992).
was as follows:
Presently, there is a similar concern [to that which gave rise to the investment tax
credit for machinery and equipment] about the declining usefulness of existing, older buildings
throughout the country, primarily in central cities and older neighborhoods of all
communities....
The committee believes that it is appropriate now to extend the initial policy objective
of the investment credit to enable business to rehabilitate and modernize existing structures.
This change in the investment credit should promote greater stability in the economic vitality
of areas that have been developing into decaying areas.
1978 U.S.C.C.A.N. at 7121.
In 1981, Congress imposed a three-tiered structure upon the tax credit: Rehabilitated historic
structures would receive a 257 credit, structures at least forty years ol d a 207 credit, and
thirty-year-old structures, 157. The Tax Court also cited the legislative history of this amendment
to validate the Commissioner's regulation. The Senate Report states as follows:
The tax incentives for capital formation provided in other sections of this bill might
have the unintended and undesirable effect of reducing the relative attractiveness of the
existing incentives to rehabilitate and modernize older business structures. Investments in
new structures and new locations, however, do not necessarily promote economic recovery
if they are at the expense of older structures, neighborhoods, and regions. A new structure
with new equipment may add little to capital formation or productivity if it simply replaces
an existing plant in an older structure in which the new equipment could have been installed.
Furthermore, the relocation of business can result in substantial hardship for individuals and
communities. Since this hardship does not affect the profitability of the business, it may not
have been fully taken into account in the decision to relocate, even though it is an economic
detriment to the society as a whole.
The increased credit for rehabilitation expenditures is intended to help revitalize the
economic prospects of older locations and prevent the decay and deterioration characteristics
of distressed economic areas.
S.REP. No. 144, 97th Cong., 1st Sess. 72, reprinted in 1981 U.S.C.C.A.N. 105, 177.
As the above excerpts attest, the Tax Court's conclusion that the 1988 regulation vindicated
the statute's intent to revitalize depressed areas, stated most forcefully in the legislative history
appended to the 1981 amendments, is not entirely without foundation; Congress undoubtedly
considered the bill's revitalizing potential as among its more attractive features. Thus, the
Commissioner contends that the prohibition on relocation contained in section 1.48-12(b)(5) naturally
arises from Congress's broadly expressed intent (in the legislative history) to benefit depressed
communities. Absent such a prohibition, the Commissioner maintains, nothing prevents a taxpayer
from doing ostensibly what the taxpayers have done here: relocating old buildings from one
neighborhood to another without conferring any visible benefit upon the "distressed economic areas"
whose plight Congress sought to ameliorate.
This fact, however, urged so strenuously by the Commissioner as determinative of the issue
before us, cannot support the stress he places upon it. Contrary to the Commissioner's interpretation,
the legislative history never speaks in exclusive terms of the goal of urban revitalization, nor can it
be said that Congress structured the statute to vindicate such a goal exclusive of other concerns. Had
it intended to do so, a restriction upon the credit's availability solely to "certified" depressed areas
would seem in order, just as the credit for historic rehabilitation was limited to certified historic
struct ures. Even with the regulatory prohibition on relocation in place, the statute presents a
singularly imprecise means for revitalizing depressed areas: Any old building, even one located in a
wealthy area, may still qualify, so long as it is not moved—even to a depressed area.
A better reading of the legislative history is that Congress merely anticipated that urban
revitalization would be a collateral benefit of the legislation. The 1978 history speaks primarily of
a desire to redress the then-skewed incentives leading businesses to invest in new equipment and
machines and new buildings to house them. While the old buildings targeted by the credit are
"primarily in central cities and older neighborhoods" (emphasis added), nothing in either the statute
or the history suggests that they are exclusively so or that the credit should be limited to those that
are. Rather, t he explanation of the provision expresses the expectation that, as an added bonus,
"[t]his change ... should promote greater stability in the economic vitality of areas that have been
developing into decaying areas." 1981 U.S.C.C.A.N. at 7121.
The legislative history to the 1981 amendment states the revitalization goals of the statute in
far stronger terms than does the 1978 history, but it too must be understood in its proper context.
The 1981 amendment merely increased (and differentiated depending on age and historical value) the
credit, in order to enhance the relative attractiveness to businesses of rehabilitating old structures
vis-à-vis relocating to newer ones. Thus, the language stressing the negative impact of relocation on
depressed communities meant relocation from old to new buildings, not from poor to wealthy areas;
just as with the 1978 history, the Congress was acting on the expressed assumption that most of the
old buildings subject to the credit were in depressed areas, and, therefore, that the increased credit
would benefit those neighborhoods primarily.
The inconclusiveness of the legislative history, however, is by no means dispositive. If it
were, we might be inclined to side with the Commissioner, in light of the deference courts generally
owe to interpretations of a statute by an agency charged with its enforcement. See Chevron U.S.A.,
Inc. v. Natural Resources Defense Council, 467 U.S. 837, 844-45, 104 S.Ct. 2778, 2783, 81 L.Ed.2d
694 (1984). Here, however, we deal not with the sort of "legislative regulation" at issue in Chevron,
see id. at 843-44, 104 S.Ct. at 2782, but with an interpretive regulation promulgated under the
Commissioner's authority pursuant to section 7805(a). Accordingly, "we owe the interpretation less
deference than a regulation issued under a specific grant of authority to define a statutory term or
prescribe a method of executing a statutory provision." Rowan Cos. v. United States, 452 U.S. 247,
253, 101 S.Ct. 2288, 2292, 68 L.Ed.2d 814 (1981); United States v. Vogel Fertilizer Co., 455 U.S.
16, 24, 102 S.Ct. 821, 827, 70 L.Ed.2d 792 (1982).
More significant for purposes of judicial analysis, however, is the lack of ambiguity in the
statute. In section 48(g), Congress crafted a detailed and reasonably precise means for determining
eligibility for the tax credit; the three-part "external wall test" and the statutory definitions of all key
phrases evidence that Congress left relatively little for the Commissioner to interpret. Like the
regulation invalidated in Vogel Fertilizer, section 1.48-12(b)(5) "purports to do no more than add
a clarifying gloss on a term ... that has already been defined with considerable specificity by
Congress." 455 U.S. at 24, 102 S.Ct. at 827.
In the absence of any ambiguity, our analysis must be confined to the plain language of the
statute. As the Supreme Court has stated,
Legislative history can be a legitimate guide to a statutory purpose obscured by ambiguity,
but in the absence of a clearly expressed legislative intention to the contrary, the language of
the statute itself must ordinarily be regarded as conclusive. Unless exceptional circumstances
dictate otherwise, when we find the terms of a statute unambiguous, judicial inquiry is
complete.
Burlington N. R.R. v. Oklahoma Tax Comm'n, 481 U.S. 454, 461, 107 S.Ct. 1855, 1860, 95 L.Ed.2d
404 (1987) (citations and internal quotation marks omitted). Before the Tax Court, the
Commissioner anchored section 1.48-12(b)(5)'s interpretation of the statute in the "external wall test"
of section 48(g)(1)(A)(iii). According to the Commissioner, that subsection's dictum that seventy-five
percent of the pre-existing external walls must be "retained in place" in order to qualify for the credit
necessarily implies a limitation on relocation: " "Retained' and "retained in place' must have different
meanings.... [E]ither the words "in place' provide a restriction on location, or they are superfluous."
Nalle, 99 T.C. at 190 (alteration in original).
We discern, however, a number of difficulties with the Commissioner's "plain language"
interpretation of section 48(g). While, generally, it is a tenet of statutory construction that every
word must be given meaning where possible, such that no word or phrase is rendered superfluous by
interpretation, the original regulations for the tax credit defined "retained in place" and said nothing
respecting a restriction on the relocation of rehabilitated structures.5 The considerable detail of the
regulation suggests that, had Congress intended to incorporate some such restriction within the
phrase "retained in place," here was an opportunity for the Commissioner to mention it. His failure
to do so until after the taxpayers had acted in reliance upon the 1980 proposed regulations weighs
heavily in our analysis, inasmuch as National Muffler directs us to consider not only such reliance
5
Initially proposed and published in 1980, see 45 Fed.Reg. 71368, 71369 (1980), § 1.48-
11(b)(4)(iv) was issued in its final form in 1985, see 50 Fed.Reg. 26696, 26699 (1985), and reads
as follows:
Retained in place. An existing external wall is retained in place if the
supporting elements of the wall are retained in place. An existing external wall is
not retained in place if the supporting elements of the wall are replaced by new
supporting elements. An external wall is retained in place, however, if the
supporting elements are reinforced in the rehabilitation, provided that such
supporting elements of the external wall are retained in place. An external wall is
retained in place even though it is covered (e.g., with new siding). Moreover, the
existing curtain may be replaced with a new curtain provided that the structural
framework that provides for the support of the existing curtain is retained in place.
An external wall is retained in place notwithstanding that the existing doors and
windows in the wall are modified, eliminated, or replaced. A wall may be
disassembled and reassembled so long as the same supporting elements are used
when the wall is reassembled. Thus, for example, in the case of the brick wall, the
wall is considered retained in place even though the original bricks are removed
(for cleaning, etc.) and put back to form the wall.
26 C.F.R. § 1.48-11(b)(4)(iv) (1992).
upon a regulation, but also the consistency of the Commissioner's interpretation of the statute when
scrutinizing regulations for their fidelity to the Congressional mandate. See National Muffler, 440
U.S. at 477, 99 S.Ct. at 1307.
More damning of the Commissioner's claim that section 1.48-12(b)(5) merely clarifies the
statute's application is its logical incoherence. As written, the regulation expressly exempts certified
historic structures; they may still be relocated and qualify for the credit. But the Commissioner does
not explain how the statutory phrase "retained in place," when applied to old buildings, means that
they may not be relocated from their original site, but implies no such limitation when applied to old,
historic buildings. 6
Similar attempts at such invest ment tax credit alchemy by the Commissioner have been
rejected recently by two courts intimately familiar with tax appeals. See Griffin Indus. v. United
States, 92-2 U.S.T.C. (CCH) ¶ 50,606 at 86129 (Cl.Ct.1992) (invalidating 26 C.F.R. § 1.48-9(g)(1));
Pepcol Mfg. Co. v. Commissioner, 98 T.C. 127, 134, 1992 WL 17457 (1992) (en banc) (same). The
Commissioner cannot explain away this ultimate incompatibility of his regulation with the statute by
reference to the legislative history; where a plain reading of the statute precludes the Commissioner's
interpretation, no legislative history—be it ever so favorable—can redeem it.7
6
We note that the statute was amended in 1986 to divorce the treatment of certified historic
structures from that of non-historic qualified rehabilitated buildings by limiting the application of
the external wall test solely to the latter structures. See Tax Reform Act of 1986, Pub.L. No. 99-
514, § 251(b), 100 Stat. 2085, 2184 (1986). The amendment renders the Commissioner's
interpretation of the phrase "retained in place" at least plausible, if only as applied prospectively
from the date of passage. But here the Commissioner has sought to extend § 1.48-12(b)(5)
retroactively to rehabilitation expenditures incurred after December 31, 1981. That the statute
had to be amended to conform to the regulation, rather than the reverse, strongly implies the
regulation's invalidity as an interpretation of the statute prior to the amendment.
Moreover, Treasury regulation 26 C.F.R. § 1.191-2(e)(6) formerly expressly
provided that the expenses incurred in relocating a certified historic structure could be
included in the rehabilitation expenses subject to amortization under Code § 191.
Although § 191 was repealed in the Economic Recovery Tax Act of 1981, Pub.L. 97-34,
§ 212(d)(1), 95 Stat. 172, 239, it is further evidence of the implausibility of § 1.48-
12(b)(5)'s interpretation of the statute.
7
Lastly, we point out that while the Commissioner disputes the taxpayers' contention that §
1.48-12(b)(5) creates an additional requirement to those contained in the statute, the taxpayers
simply are quoting the Commissioner's own words back to him. The notice of proposed
rulemaking that introduced § 1.48-12(b)(5) in 1985 stated that "[t]he proposed regulations
We find, therefore, that the interpret ation urged by the Commissioner, and embodied in
section 1.48-12(b)(5) finds no support in the statutory text. While this resolution relieves us of the
need to reach the taxpayers' argument against the retroactive application of the regulation, we find
troubling the Commissioner's understanding of the appropriate burden to be placed upon taxpayers
seeking to comply with the Code. According to the taxpayers, they closely examined the Code and
accompanying regulations available at the time they conceived their business plan. According to the
Commissioner, the taxpayers were wanting in diligence; somehow, they were obliged not only to
consult the legislative history, but to glean therefrom the doubtful conclusion that their credits would
be disallowed were they to relocate the buildings after rehabilitating them.
Thus to require similarly-situated taxpayers in the future to examine the legislative history
before relying upon the plain-spoken word of Congress would be to teach what we believe to be
a false and disruptive lesson in the law. It says to the bar that even an "unambiguous [and]
unequivocal" statute can never be dispositive; that, presumably under penalty of malpractice
liability, the oracles of legislative history, far into the dimmy past, must always be consulted.
This undermines the clarity of law, and condemns litigants (who, unlike us, must pay for it out
of their own pockets) to subsidizing historical research by lawyers.
Conroy, --- U.S. at ----, 113 S.Ct. at 1567 (Scalia, J., concurring) (brackets in original). Yet this
"false and disruptive lesson in the law" is precisely that which the Tax Court took upon itself to teach
the taxpayers in this case. "Confronted with recently enacted legislation, and in light of the magnitude
of their rehabilitation project," the court stated, "petitioners should have examined the statute and its
background in greater detail prior to proceeding with the purchase of the buildings." Nalle, 99 T.C.
at 196. We disagree and, accordingly, REVERSE the decision of the Tax Court.
contain additional restrictions applying in the case of buildings that have been moved." See L.R.
238-81, 1985-2 C.B. 777, 778 (emphasis added).