Johnston v. Commissioner

F I L E D
United States Court of Appeals
Tenth Circuit

PUBLISH MAY 19 1997

UNITED STATES COURT OF APPEALSPATRICK FISHER
Clerk
TENTH CIRCUIT

WILLIAM A. JOHNSTON and
VERNA LEE C. JOHNSTON,

Petitioners-Appellants,

v.

COMMISSIONER OF INTERNAL
REVENUE, No. 95-9006

Respondent-Appellee,

============================

JOHN A. MCNAMARA,

Amicus Curiae.

Appeal from the UNITED STATES TAX COURT
(Tax Court No. 28135-92)

William A. Johnston and Verna Lee C. Johnston, Pro Se.

John A. McNamara, Hall & Evans, L.L.C., Colorado Springs, Colorado, Special
Counsel appointed by the Court as Amicus Curiae.

Jonathan S. Cohen (Loretta C. Argrett, Assistant United States Attorney General,
Richard Farber and Linda E. Mosakowski, Attorneys, Tax Division, Justice
Department, Washington, D.C. on the briefs), for Respondent-Appellee.
Before SEYMOUR, Chief Judge, LOGAN and LUCERO, Circuit Judges.

SEYMOUR, Chief Judge.

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 William A. Johnston and Verna Lee C. Johnston appeal from a judgment of

the Tax Court upholding the Commissioner’s notice of deficiency for federal

income taxes due on their 1988 and 1989 joint returns. 1 The deficiency noticed

by the Commissioner included $11,913.31 in income tax credit claimed by the

Johnstons under sections 46 and 48 of the Internal Revenue Code for sums spent

in renovating a residential duplex owned and rented out by the Johnstons. The

Commissioner took the position that the Johnstons did not qualify for the tax

credit because I.R.C. § 48(a)(3) excludes from the credit property used for

lodging. The Tax Court held for the Commissioner, concluding that the plain

language and legislative history of the tax credit provisions support her

interpretation. We affirm.

1
The Johnstons represented themselves in this appeal, and filed a lucid,
well-argued brief with the court. Due to the complexity of the statutory
provisions involved here, we appointed counsel to brief and argue the issues in
the case as amicus curiae. For convenience, in this opinion we attribute to the
Johnstons those arguments asserted on their behalf by the amicus.

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 I.

Background

The case was submitted to the Tax Court on fully stipulated facts. The sole

question is whether expenditures on the renovation of residential rental property

which is not a certified historic structure qualify for an investment tax credit.

This is a question of law, which we review de novo. ABC Rentals of San

Antonio, Inc. v. Commissioner, 97 F.3d 392, 395 (10th Cir. 1996).

The Johnstons purchased a residential duplex in 1980 in Salt Lake City,

Utah, and rented it to tenants through 1987. The duplex was built in 1914, but it

is not a certified historic structure. The Johnstons made extensive renovations to

the duplex, for which they spent a total of $119,133.13. They claimed a ten

percent (10%) rehabilitation tax credit pursuant to I.R.C. §§ 46(a)(3) and

46(b)(4)(A)(i) 2 on their 1988 and 1989 joint returns, $7,333.12 for 1988 and

$4,580.19 for 1989.

2
References to the provisions of the Internal Revenue Code throughout this
opinion, where a date parenthetical is not indicated, refer to the text of such
provisions in existence at the relevant time discussed in the body of the opinion.
Section 48 of the I.R.C., as effective during the 1988 and 1989 tax years, is set
out in relevant part in an appendix hereto.

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 II.

The Evolving Statutory Framework

In 1962, Congress created in section 38 of the Internal Revenue Code a

broad tax credit for investment by business and industry. I.R.C. § 38, as enacted

by Revenue Act of 1962, Pub. L. No. 87-834, § 2, 76 Stat. 960, 960-63. “[T]he

purpose of the credit . . . [was] to encourage modernization and expansion of the

Nation’s productive facilities and to improve its economic potential by reducing

the net cost of acquiring new equipment.” H.R. C ONF . R EP . N O . 87-2508 (1962),

reprinted in 1962 U.S.C.C.A.N. 3732, 3734. The amount of the credit for various

types of investment was defined in I.R.C. § 46. The tax credit applied to a wide

range of investments in productive property such as tools, machinery, and other

equipment, I.R.C. § 48(a)(1), but it did not apply to buildings, id. §§ 48(a)(1)(A),

(B). The tax credit generally did not apply to investments in equipment for

structures used to furnish lodging, id. § 48(a)(3), although a few exceptions were

carved out, most notably for hotels, id. § 48(a)(3)(B).

In 1978, Congress amended the investment tax credit to allow for the first

time a credit for investments in buildings. Revenue Act of 1978, Pub. L. No. 95-

600, § 315, 92 Stat. 2763, 2828-29. New sections 48(a)(1)(E) and 48(g) provided

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a credit for the rehabilitation of buildings more than 20 years old. 3 However,

Congress continued to exclude from the tax credit buildings used for lodging;

thus, the credit applied to rehabilitation expenditures “for all types of business

and productive buildings, except those, such as apartments, which are used for

residential purposes.” H.R. C ONF . R EP . N O . 95-1800, at 226 (1978), reprinted in

1978 U.S.C.C.A.N. 7198, 7227. In 1981, Congress extended the tax credit to

investments to rehabilitate certified historic structures used for residential rental

property. I.R.C. § 48(a)(3)(D), as enacted by Economic Recovery Tax Act of

1981, Pub. L. No. 97-34, § 212(c), 95 Stat. 172, 239. The parties agree that prior

to 1986, an investment tax credit was provided only for renovation of those

residential buildings which were certified historic structures.

In 1986, Congress amended the definition in section 48(g)(2) of “qualified

rehabilitation expenditures” to explicitly list “residential rental property.” I.R.C.

§ 48(g)(2)(A)(i), as amended by Tax Reform Act of 1986, Pub. L. No. 99-514, §

251(b), 100 Stat. 2085, 2184-85. The Johnstons contend that this 1986

amendment brought their renovation expenses within the scope of the investment

tax credit. It is undisputed that the Johnstons’ investments in renovations are

3
The age requirements for rehabilitation credit for a building other than a
certified historic structure have been modified several times. For the Johnstons’
tax years, a noncertified building was required to be in use before 1936 in order
to qualify for the credit. I.R.C. § 48(g)(1)(B).

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“qualified rehabilitation expenditures” as defined by section 48(g) of the Code,

and that the investment was made in a “qualified rehabilitated building” as

defined by the same section. The sole question before us is whether section

48(a)(3), the lodging exclusion, operates to exclude the Johnstons’ property from

the scope of the tax credit otherwise provided for in section 48(a)(1)(E).

III.

Analysis

A set of interlocking statutory provisions 4 determine if the Johnstons’

building rehabilitation is “section 38 property” eligible for an investment tax

4
The text of specific provisions is described throughout. We provide a
capsule summary of the provisions here to aid the reader. In this table, we
indicate the section number, its date of enactment, and its purpose in the statutory
scheme:

§ 38 [1962]: establishes an investment tax credit
§ 48(a)(3) [1962]: excludes from credit property used to furnish lodging
§ 48(a)(1)(E) [1978]: extends the credit to “qualified rehabilitation” of
buildings
§ 48(g) [1978]: defines “qualified rehabilitation”
§ 48(a)(3)(D) [1981]: extends credit to rehabilitation of residential certified
historic property by exempting from the lodging
exclusion
§ 48(g)(2)(A)(i)(II): defines “qualified rehabilitation” to include “residential
[1986] rental property”

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credit. 5 First, section 48(g) defines “qualified rehabilitation expenditures” to

include “residential rental property.” Second, section 48(a)(1) applies the

investment tax credit, “[e]xcept as provided in this subsection,” to “that portion of

the basis which is attributable to qualified rehabilitation expenditures (within the

meaning of subsection (g)).” Finally, section 48(a)(3), which we refer to as the

lodging exclusion, excludes from the tax credit “[p]roperty which is used

predominantly to furnish lodging,” with the principal exceptions of hotels and

certified historic structures. To qualify as section 38 property entitled to an

investment tax credit, an expenditure to rehabilitate older buildings must thus

satisfy two distinct requirements: (1) the rehabilitative expenditure must meet the

criteria established in section 48(g), referenced in section 48(a)(1)(E); and (2) the

expenditure must not be excluded by any other provision of section 48(a). The

contested issue is whether the Johnstons’ property, otherwise eligible under

sections 48(g) and 48(a)(1), is excluded by the operation of the section 48(a)(3)

lodging exclusion.

The Johnstons’ duplex is rented to tenants. The duplex is residential

property used for lodging, and does not meet any of the exceptions to the lodging

5
The amount of the credit is defined in section 46. In 1988, the credit for
qualified rehabilitation expenditures was 20 percent for certified historic
structures, and 10 percent for qualified rehabilitated buildings other than certified
historic structures. I.R.C. §§ 46(a)(3), 46(b)(4).

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exclusion. On the face of the statute, therefore, the Johnstons’ rehabilitation

expenditures do not qualify for the tax credit. The Johnstons attempt to avoid this

result by reading the lodging exclusion to be inapplicable to their situation. They

advance two lines of argument. First, they assert that the lodging exclusion was

not intended to cover this type of investment. Second, they contend that the

language and intent of section 48(g), as amended in 1986, conflicts with the

lodging exclusion, and that this conflict should be resolved in favor of the

taxpayer.

A. The Lodging Exclusion

The Johnstons make several arguments against the applicability of the

lodging exclusion. First, they maintain that the term “lodging” applies only to

buildings used to house transients, not longer-term rentals. Contrary to the

Johnstons’ inference, the legislative history indicates that Congress has

consistently understood the term “lodging” to include residential property

generally, not just that used to house transients. In discussion of a draft of the

1962 bill, the committee explanation used the terms “lodging” and “residential”

nearly interchangeably: “‘Lodging, or residential real estate, . . . [is] excluded on

the grounds that this property for the most part is used by consumers rather than

in production.’” LaPoint v. Commissioner, 94 T.C. 733, 736 (1990) (quoting

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S TAFF OF J OINT C OMM . ON I NTERNAL R EVENUE , 87 TH C ONG ., D ISCUSSION D RAFT

OF R EVENUE B ILL OF 1961 9 (J. Comm. Print 1961)). In 1978, Congress extended

the tax credit to buildings for the first time, stating: “The bill extends the

investment credit to rehabilitation expenditures incurred in connection with

existing buildings used in all types of business or productive activities except

buildings, such as apartments, which are used for residential purposes.” H.R.

R EP . N O . 95-1445, at 86-87 (1978), reprinted in 1978 U.S.C.C.A.N. 7046, 7121.

The report went on to note that rehabilitation of hotel buildings would be eligible:

“Buildings used for lodging will not generally be eligible (sec. 48(a)(3)).

However, the exception for lodging facilities would not apply to hotels and motels

where the predominant portion of the accommodations is used by transients.” Id.

at 87 n.1. These quotations indicate that Congress recognized the lodging

exclusion applied principally to residential units occupied by nontransients.

Moreover, if we were to adopt the Johnstons’ reading, the lodging exclusion

would be rendered a virtual nullity in light of section 48(a)(3)(B)’s exception of

hotels and motels from the general lodging exclusion.

The Johnstons also contend that section 48(a)(3)’s lodging exclusion was

not intended to apply to real property. We are unable to find support for this

distinction in the text of the statute. When section 48(a)(3) was included in the

original law in 1962, the investment tax credit did not apply to buildings; the

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lodging exclusion thus initially operated only to exclude investments in equipment

used in the furnishing of lodging. In 1978, Congress extended the tax credit to

certain real property by adding sections 48(a)(1)(E) and 48(g). Congress did not,

however, exempt paragraph E from the general section 48(a) reservation

(“[e]xcept as provided in this subsection”); therefore the section 48(a)(3) lodging

exclusion applies to rehabilitation expenditures. Nothing in the language of

section 48(a)(3) suggests that it refers only to equipment. Moreover, in 1981,

Congress added section 48(a)(3)(D), exempting from the lodging exclusion

certified historic structures “to the extent of that portion of the basis which is

attributable to qualified rehabilitation expenditures.” The phrase “qualified

rehabilitation expenditures” applies only to building renovations defined in

section 48(g), not investments in equipment. The addition of section 48(a)(3)(D)

would have been irrelevant to the extension of the tax credit to certified historic

buildings absent congressional understanding that section 48(a)(3) applied to real

property and would otherwise exclude buildings used for lodging from the tax

credit. The meaning of the term “lodging,” in its statutory context, is not

ambiguous.

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B. The 1986 Amendment

The Johnstons alternatively contend that if the lodging exclusion was

otherwise relevant, it was rendered inapplicable by the 1986 alteration of section

48(g) to include “residential rental property” in the definition of “qualified

rehabilitation expenditures.” I.R.C. § 48(g)(2). They suggest that this created a

conflict between the plain language of section 48(g) and the language of section

48(a)(3), and that Congress intended for section 48(g) to govern and to give tax

credit eligibility to rehabilitation of residential rental property.

The suggested conflict between subsections (a) and (g) is more apparent

than real. Sections 48(g) and 48(a)(3) are not to be read in the disjunctive, as the

Johnstons would have us do, but in the conjunctive. Section 48(g) defines a

broad category of expenditures which are potentially eligible for a tax credit, as

provided for in section 48(a)(1)(E). But section 48(a)(3)’s negative language--

“[p]roperty . . . used predominantly to furnish lodging . . . shall not be treated as

section 38 property”-- is intended to exclude property that might otherwise fall

within the category eligible for the tax credit, and section 48(a)(1) by its own

terms incorporates the limitations of section 48(a)(3). 6

6
We note that a conflict would exist, and a much more difficult question of
congressional intent would be presented, if the exclusion in section 48(a)(3)
operated to deny credit to all property encompassed in residential rental property
as used in section 48(g). In this case, however, some residential rental property,
(continued...)

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 There is no conflict or ambiguity merely because several closely

interlocking statutory provisions must be read together to determine if a given

expenditure is eligible for a credit. There is nothing ambiguous about a statutory

scheme which defines a broad category of investment, I.R.C. § 48(g); provides

that the category shall be eligible for a tax credit except as expressly excluded, id.

§ 48(a)(1); provides for a specific exclusion, id. § 48(a)(3); and then carves a

number of narrow exceptions to that exclusion, id. §§ 48(a)(3)(A) - (D). To

qualify for a credit, the Johnstons must do more than show that their expenditure

falls within the category of expenditures defined in section 48(g) as potentially

eligible for the credit. Notwithstanding the inclusion of residential rental

property in section 48(g), the Johnstons do not qualify for a tax credit if their

property is excluded by other provisions of section 48(a). Taken together,

sections 48(g) and 48(a)(3) exclude the Johnstons’ duplex from the tax credit

because it is used predominantly for lodging. Although the statutory scheme is

complex, the statute’s language is plain on its face. 7

6
(...continued)
that in hotels and certified historic structures, is eligible for the tax credit. I.R.C.
§§ 48(a)(3)(B), (D).
7
Because we find the statutory language--although convoluted--plain on its
face, we need not address the import of the Treasury regulations applying these
sections, 26 C.F.R. § 1.48-1(h), except to conclude that the regulations are a
permissible interpretation of the statute insofar as they deny investment tax credit
for rehabilitation of noncertified residential buildings.

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 The 1986 amendment did not create any ambiguity on the face of the

statute. Furthermore, the 1986 legislative history indicates that no substantive

change was intended with respect to the general ineligibility of residential

property for the credit. Thus, the Senate Report accompanying the 1986

amendments noted that “[a]s under present law, the 10-percent credit for the

rehabilitation of buildings that are not certified historic structures is limited to

nonresidential buildings.” S. R EP . N O . 99-313, at 754 (1985), reprinted in 1986-3

C.B. 1, 754 (emphasis added).

The Johnstons advance several other arguments about the legislative

structure and purpose. They argue that the title of 48(g), which refers to “Special

rules for qualified rehabilitated buildings,” I.R.C. § 48(g) (emphasis added), is

informative. However, “under the general rules of statutory interpretation, the

title to a statutory provision is not part of the law itself, although it can be used to

interpret an ambiguous statute.” United States v. Glover, 52 F.3d 283, 286 (10th

Cir. 1995) (citing Oklahoma v. United States Civil Serv. Comm’n, 153 F.2d 280,

283 (10th Cir. 1946), aff’d, 330 U.S. 127 (1947)). The Johnstons may rely on the

section title only to clarify an ambiguous statute, not to create an otherwise

nonexistent conflict.

The Johnstons contend that the reading of the lodging exclusion we adopt

here conflicts with the congressional purpose, first expressed in the extension of

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the tax credit to buildings in 1978, to restore deteriorated buildings in the

country’s urban centers. In 1978, Congress expressed concern “about the

declining usefulness of existing, older buildings throughout the country, primarily

in central cities and older neighborhoods of all communities.” H.R. R EP . N O . 95-

1445, at 86 (1978), reprinted in 1978 U.S.C.C.A.N. 7046, 7121. Although

Congress’s extension of the credit to buildings was intended to address this

problem, it did so only with respect to nonresidential buildings (and those

buildings, such as hotels, which were exempted from the lodging exclusion). Id.

at 86-87. In keeping with the original purposes of the credit, Congress has never

used the section 38 tax credit to advance a general goal of rehabilitating

residential buildings--with the notable exception of certified historic buildings.

There is no evidence that a significant change was intended with the 1986

amendments.

The Johnstons also suggest that under the current version of the law they

would be entitled to the tax credit, and that Congress’ 1990 modifications to the

investment tax credit clarify Congress’ view that such a credit for residential

rehabilitation was also provided in the 1986 version of the law. Even if we were

persuaded to rely on the actions of a subsequent Congress to ascertain the

meaning of the prior law, the Johnstons’ legal premise is mistaken. Although the

current version of the Code continues to include “residential rental property” as

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eligible to be a “qualified rehabilitation expenditure,” I.R.C. § 47(c)(2) (1994),

the current version also retains the exclusion from the credit for “property which

is used predominantly to furnish lodging,” id. § 50(b)(2). Contrary to the

Johnstons’ suggestion, Congress did not eliminate the lodging exclusion in 1990,

but simply shifted its location.

IV.

Conclusion

Since the first extension of the section 38 tax credit to buildings in 1978,

Congress has consistently limited the credit to nonresidential buildings and those

residential buildings which are specifically exempted from the lodging exclusion

in section 48(a)(3). Nothing in the text or history of the 1986 amendments

suggests that Congress intended to expand the section 38 tax credit to noncertified

residential rehabilitation, or to restrict the scope of the lodging exclusion. When

Congress amended the statute in 1981 to extend the credit to renovation of

certified historic residential buildings, it effected this change by amending section

48(a)(3) to remove certified historic structures from the reach of the lodging

exclusion. We are convinced that if Congress had intended in 1986 to extend the

credit broadly to residential renovations, it would have effected this intent by

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modifying the lodging exclusion.

Based on the forgoing, we AFFIRM the judgment of the Tax Court.

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 APPENDIX

Section 48 of the Internal Revenue Code defines property eligible for the
investment tax credit established in section 38 as follows:

(a) Section 38 property
(1) In general
Except as provided in this subsection, the term, “section
38 property” means--
....
(E) in the case of a qualified rehabilitated building, that
portion of the basis which is attributable to qualified
rehabilitation expenditures (within the meaning of
subsection(g)) . . . .

....

(3) Property used for lodging
Property which is used predominantly to furnish
lodging or in connection with the furnishing of lodging
shall not be treated as section 38 property. The
preceding sentence shall not apply to--
(A) nonlodging commercial facilities which are
available to persons not using the lodging facilities on
the same basis as they are available to persons using the
lodging facilities,
(B) property used by a hotel or motel in
connection with the trade or business of furnishing
lodging where the predominant portion of the
accommodations is used by transients,
(C) coin-operated vending machines and coin-
operated washing machines and dryers, and
(D) a certified historic structure to the extent of
that portion of the basis which is attributable to
qualified rehabilitation expenditures.

....

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 (g) Special rules for qualified rehabilitated buildings
For purposes of this subpart--
....
(2) Qualified rehabilitation expenditure defined
For purposes of this section--
(A) In general
The term “qualified rehabilitation expenditure”
means any amount properly chargeable to capital
account--
(i) for property for which depreciation is
allowable under section 168 and which is--
(I) nonresidential real property,
(II) residential rental property,
(III) real property which has a class life of
more than 12.5 years, or
(IV) an addition or improvement to property
described in subclause (I), (II), or (III), and
(ii) in connection with the rehabilitation of a
qualified rehabilitated building.

I.R.C. § 48 (emphasis added).

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