*41 Decision for the government.
P-H operated a law practice as a sole proprietorship at all
relevant times. R audited Ps' 1987 joint tax return and made
several adjustments to the Schedules A and C attached to this
tax return. Ps agreed to R's adjustments and the resulting
deficiencies and additions to tax. In 1994, R seized real
property that Ps owned; in 1995, R sold the property and applied
the proceeds to Ps' underpayment of their 1987 income tax
liability and interest thereon. On Schedule C of their 1995
joint tax return, Ps deducted the 1987 underpayment interest
that had been thus paid.
1. Held: Insofar as
(Dec. 22, 1987), apply under the circumstances herein to
characterize the 1987 underpayment interest thus paid in 1995 as
not being "interest * * * on indebtedness properly allocable
to a trade or business" within the meaning*42 of sec.
163(h)(2)(A),
under ch. 1, I.R.C. 1986, these regulations are valid.
2. Held, further, Redlark v. Commissioner,
1998), will no longer be followed.
3. Held, further, Ps are not entitled to deduct the
interest they paid in 1995 on account of the underpayment of
their 1987 income tax liability.
*45 CHABOT, Judge: Respondent determined a deficiency in Federal individual income tax for 1995 against petitioners in the amount of $ 29,879. 2 The issue for decision is whether petitioners may deduct for 1995 the interest they paid in 1995 on their 1987 Federal individual income tax underpayment. 3
*43 FINDINGS OF FACT
Some of the facts have been stipulated; the stipulations and the stipulated exhibits are incorporated herein by this reference.
Petitioners Edward A. Robinson III (hereinafter sometimes referred to as Edward), and Diana R. Robinson resided in Louisiana when they filed their petition in the instant case.
A. Edward's BackgroundIn 1970, Edward was graduated from Grambling State University, cum laude, with a double major in political science and *46 REnglish. In 1971, Edward received a master's degree in criminal jurisprudence from the State University of New York at Albany. In 1975, Edward received his law degree from Rutgers University. Edward also was awarded an honorary LL.D. from World University, in Tucson, Arizona.
After his Rutgers graduation, Edward worked as the chief administrator of the Louisiana Justice Department. Edward resigned from this position and opened his own law practice in 1979. Edward's law practice focused almost exclusively on personal injury cases. At all relevant times, Edward's law practice was operated as a sole proprietorship.
B. 1987 Return and Audit Thereof
During 1989, respondent audited petitioners' 1986 and 1987 joint tax returns. 4
On their*44 1987 tax return, petitioners reported $ 6,274 interest income and $ 60,677 net profit from Edward's law practice. On the 1987 Schedule C, petitioners reported $ 388,000 gross receipts, $ 18,500 cost of goods sold, and $ 308,823 deductions, leading to the $ 60,677 net profit. On the 1987 Form 1040, petitioners reported $ 3,866 chapter 1 income tax, $ 5,387 chapter 2 self-employment tax, $ 502 addition for underpayment of estimated tax, and no withholding or other payments, for a total of $ 9,755 owed. Petitioners timely paid this $ 9,755.
Respondent proposed adjustments to petitioners' 1987 taxable income, and a deficiency and additions to tax as shown in table 1.
Table 1
| Item | Amount |
| 1 Unreported income | $ 25,377.81 |
| Sched. C adjustment--net | 195,715.95 |
| Sched. A adjustment-- | |
| 2*47 consequential | 6,389.00 |
| Sched. A adjustments--other | (658.59) |
| Deficiency | 83,632.30 |
| Addition-sec. 653(a)(1)(A) | 4,181.62 |
| Addition--sec. 6653(a)(1)(B) | 3 |
| Additioon--sec. 6661 | 20,908.08 |
*45 Petitioners agreed to these proposed changes, and the appropriate amounts were assessed.
Respondent seized certain of petitioners' property in 1994, sold the property in 1995, and in 1995 applied $ 69,617 of the proceeds to petitioners' interest on the underpayment of their 1987 tax liability.
The $ 69,617 interest payment was not related to any liability on petitioners' 1987 tax return as originally filed, as all such liability had been timely paid. This interest payment was applied only to interest assessed as a result of the 1987 audit deficiency in tax and*46 additions. Petitioners deducted this $ 69,617 as "Interest: * * * Other" on line 16b of the Schedule C (Edward's law practice) on their 1995 tax return.
On their 1995 tax return, petitioners reported $ 359,915 net profit from Edward's law practice (Sched. C), $ 1,410 royalty income (Sched. E), and a $ 1,702 loss on sales of business property (Form 4797). On the 1995 Schedule C, petitioners reported $ 523,480 gross receipts, $ 26,340 cost of goods sold, and $ 137,225 deductions (including the disputed $ 69,617 other interest item), leading to the $ 359,915 net profit. On the 1995 Form 1040, petitioners reported $ 108,735 chapter 1 income tax, $ 17,228 chapter 2 self-employment tax, $ 59 addition for underpayment of estimated tax, and $ 110,000 estimated tax payments, for a total of $ 16,022 owed.
_____________________
The $ 69,617 was interest paid in 1995, but it was not on indebtedness properly allocable to Edward's law practice, petitioners' only relevant trade or business.
OPINION
A. The Parties' ContentionsThe parties focus their dispute on whether
*48 Petitioners contend that the $ 69,617 interest qualifies for the exemption from the disallowance rule and that a regulation to the contrary is invalid, relying on this Court's opinions to that effect. In the alternative, they contend that the regulation is not an authoritative interpretation of the applicable statutory language, the regulation having been issued before the statutory language was enacted.
Respondent relies on the regulation as an authoritative interpretation of an ambiguous statute and notes that the Courts of Appeals of five different circuits have come to the same conclusion. As to the prior opinions on which we relied in invalidating the regulation, respondent's brief states that "It is therefore respondent's position that pre-
Neither side contends that we should distinguish between the factual settings presented in our two prior opinions on this subject. Apart from respondent's alternative contention as to the 1987 Schedule A adjustments, respondent apparently accepts that, if the regulations are not valid, then the interest expense resulting from the 1987 Schedule C adjustments is properly a 1995 Schedule C deduction.
B. Summary of ConclusionsWe agree with respondent's primary position and much of respondent's analysis.
In the instant case we focus on the prohibition in
Examination of the history of the legislation, both the sequence of events and the formal explanations, does not lead to any clear answer as to the meaning of the finally adopted statutory language. It is clear, however, that the Congress chose language different from the statutory language that had been construed in earlier cases. This strongly suggests that the Congress intended a meaning different from the older statutory language, but it does not clearly indicate what the Congress intended that difference to be.
It is in this setting*50 that we reach the Treasury Regulations --
It is accepted that these regulations, if not invalid, would result in our concluding that interest on petitioners' 1987 underpayment of Federal income taxes is nondeductible personal interest. We conclude that, taking into account the uncertainty as to the meaning of the statute, even as informed by the history of the legislation, these regulations constitute a permissible interpretation of the statute. As a result, the regulations are not invalid, and so petitioners' claimed interest expense deduction is not allowed under chapter 1.
*50 C. Caselaw Setting of the IssuesWe first addressed the validity of
The Courts of Appeals for the Ninth and Seventh Circuits reversed our decisions in
*53 The Courts of Appeals uniformly relied on the following rationale to support their conclusions that
Although the judicial landscape surrounding
We have considered the opinions of the Courts of Appeals for the Fourth, Sixth, Seventh, Eighth, and Ninth Circuits; those opinions are entitled to all due respect.
*52 *55 Accordingly, we proceed to reconsider our opinions in
We set forth the pertinent provisions of
* * * * * * *
(h) Disallowance of Deduction for Personal Interest. --
(1) In general. -- In the case of a taxpayer
*56 other than a corporation, no deduction shall be allowed under this chapter [chapter 1, relating to normal taxes and surtaxes] for personal interest paid or accrued during the taxable year.
(2) Personal interest. -- For purposes of this subsection, the term "personal interest" means any interest allowable as a deduction under this chapter other than --
(A) interest paid or accrued on indebtedness properly allocable to a trade or business (other than the trade or business of performing services as an employee),
(B) any investment interest (within the meaning of subsection (d)),
(C) any interest which is taken into account under
(D) any qualified residence interest within the meaning of paragraph (3)), and
*53 (E) any interest payable under
Petitioners contend that the interest they paid in respect of their 1987 income tax underpayment falls within the terms of
In November 1984, the Treasury Department issued a report to the President recommending numerous revisions of the tax*58 laws. One of the proposals was designed to
curtail the subsidy implicit in the [then] current law deduction of interest on debt to finance large amounts of passive, tax- preferred, investment assets (such as corporate stock) or extraordinary consumption expenditures (such as second homes).
In May 1985, President Reagan issued a report which included a proposal to subject "all interest not incurred in connection with a trade or business" to the
The House bill followed the President's proposal in that it would impose a limit on deductibility of "nonbusiness interest". The latter term was defined to exclude "any interest which is allowable as a deduction in computing adjusted gross income". The Ways and Means Committee report stated that "Interest expense that is paid or incurred in carrying on a trade or business * * * is not subject to the interest deduction limitation under the bill." H. Rept. 99-426 at 298, 1986-3 C.B. (Vol. 2) 1, 298.
The Senate amendment separated out the investment interest provisions (in a revised ) and provided a prohibition (new
The conference committee reached its agreement on August 16, 1986. Thirteen days later, the staff of the Joint *54 Committee on Taxation published a summary of the agreement, hereinafter sometimes referred to as the Joint Committee staff summary. Twenty days after that, the conference committee published its report. Thirty-four days after that, the Tax Reform Act of 1986 was enacted. The conference committee generally followed the Senate's approach, but changed the language to prohibit any deduction for "personal interest". For our purposes, "personal interest" was defined the same way the Senate bill defined "consumer interest". The Joint Committee staff summary stated as follows:
Interest on underpayments of tax (other than certain deferred estate taxes) is treated as personal interest under the provision.
The conference committee explanation includes the following sentence:
Personal interest also generally includes interest on tax deficiencies.
*60 On May 4, 1987, the staff of the Joint Committee on Taxation published its "Blue Book", which included the following:
Personal interest also includes interest on underpayments of individual Federal, State or local income taxes notwithstanding that all or a portion of the income may have arisen in a trade or business. * * *
On June 10, 1987, the chairman and ranking minority member of each of the tax-writing committees introduced bills to make technical corrections to TRA 1986. Each bill included the following:
Subparagraph (A) of
Each bill provided that the change was to take effect as though it had been included in TRA 1986. The Ways and Means Committee report stated that the change in
For reasons unrelated to this provision, the technical corrections were dropped from the Omnibus Budget Reconciliation Act of 1987, Pub. L. 100-203, 101 Stat. 1330. The same provisions were then introduced as part of the Technical Correction Act of 1988, with the same effective dates and explanations, and ultimately enacted without change by the Technical and Miscellaneous Revenue Act of 1988 (TAMRA 1988), Pub. L. 100-647, 102 Stat. 3342.
The language thus enacted is what we must construe in the instant case.
F. Analysis of the StatuteFrom the foregoing, we draw the following conclusions.
(1) Initial Objectives
Although the movement to enact what became
It is not at all unusual for the Congress to act outside the confines of*62 the problem described in the legislative history; the Congress has done so in many different areas of the tax law. See, e.g.,
*56 In light of the evolution of
*63 (2) The Varying "Handles"; Definition in the Statute
When the Congress enacts a definition of a term, the statutory definition controls over definitions in general dictionaries.
A review of the relevant history of the legislation reveals the varying phraseology that the Congress employed in the legislative process that culminated in the enactment of
We make these observations because of the apparent focus on the question of whether interest paid*64 in respect of an individual's Federal income tax liability is a "personal obligation". See
that an individual's income tax liability, regardless of the nature of the income giving rise to the liability, is a personal obligation and that, consequently, interest owed by such individual because of a failure to pay his tax obligation on time necessarily is also a personal obligation.
See alsoWhen, as in the instant case, the Congress*66 undertakes to define a term explicitly, "we must follow that definition, even if it varies from that term's ordinary meaning."
In
In the instant case, in restricting the allowance rule of
(3) The Pre-TRA 1986 Cases
In
The question remains, however, whether the elements giving rise to the deficiencies to which the interest herein relates are of such a nature as to permit such interest to constitute a business expense within the meaning of
______________
*70 We then analyzed three opinions:
In
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
Later in our opinion in
we have consistently been reluctant to conclude that Congress overruled existing case law when the statutory language does not compel such a conclusion and Congress has not otherwise expressly indicated that such a result should ensue. * * *
As we noted, supra, in H.R. 3838 as reported by the Ways and Means Committee, "nonbusiness interest" was defined to exclude "any interest which is allowable as a *61 deduction in computing adjusted gross income". Proposed amendment to
However, that language was not enacted. See infra, Appendix. Instead, in TRA 1986 the Congress defined "personal interest" to exclude "interest paid or accrued on indebtedness incurred or continued in connection with the conduct of a trade or business".
In
Ordinarily, we would expect that a change in statutory language indicates a change in meaning.
*62 Application of this general rule (if the statutory language is different, then it is presumed that the meaning is different) to the matter before us leads to the conclusion that
We do not intend in the instant case to overrule any of the three pre-TRA 1986 opinions -- Standing, Polk, or Reise. The statutory terms construed in those cases have been carried forward from the Internal Revenue Code of 1939 and now appear in
*76 However, the result of the Congress's decisions (1) to use different language in
(4) The Conference Report, The 1986 Blue Book
In
*63 Personal interest also generally includes interest on tax deficiencies
-- with special focus on "generally" and "tax deficiencies". We noted that "deficiency" is a term of art with a settled definition. We interpreted the conference committee sentence as follows (
In short, we think that when the conference committee used the phrase "tax deficiencies", it was referring to amounts due by way of income, estate, and gift taxes. In this context, the word "generally" in the conference committee report takes on a significant meaning. *77 It signals that not all interest relating to income tax, etc., deficiencies are included in "personal interest". The logical explanation for what is excluded by "generally" is such interest that constitutes an ordinary and necessary business expense and is therefore "allocable to an indebtedness of a trade or business" within the meaning of the exception clause of
We then discussed the 1986 Blue Book's status and concluded as follows (
Where there is no corroboration in the actual legislative history, we shall not hesitate to disregard the General Explanation*78 as far as congressional intent is concerned. 7 See
*79 We conclude that there are several difficulties with the foregoing analysis in our opinion in
Firstly, interest ordinarily is imposed on underpayments or overpayments, not on deficiencies. See, e.g.,
Thus, it is not clear whether the term "deficiency", to which we attributed such significance in
Secondly, the word "generally" may merely serve the function of alerting the reader that there is a category of interest on tax underpayments that does not fit into the definition of "personal interest" -- to wit, the interest described in subparagraph (E) of
(E) any interest payable under
Thirdly, the Joint Committee staff summary, published 20 days before the Conference Report, described the provision as follows:
Interest on underpayments of tax (other than certain deferred estate taxes) is treated as personal interest under the provision.
Apart from the use of "underpayments" rather than "deficiencies", the Joint Committee staff summary appears to be *65 completely consistent with the conference committee sentence on which we focused in
Fourthly, even if we were to agree that the use of "deficiencies" in the conference committee sentence is significant, the only significance stated in
(5) Conclusions From the Statute and the History of the
Legislation
The relevant statutory language is not the term "personal interest", but the definitional term in subparagraph (A) of
The relevant statutory language does not provide a clear answer to the dispute before us in the instant case.
The history of the legislation clearly shows an evolution in the Congress's thinking during the legislative process; it*83 provides some support for the validity of the Treasury regulations, but that support is rebuttable. Apart from the analysis in Redlark, that history does not provide support for the conclusion that the Treasury regulations are invalid.
In this relatively inconclusive setting, we proceed to examine the Treasury regulations.
G. The RegulationsIn the instant case, we consider the validity of the following regulations: (1)
(1) Standards for Judging Validity of Regulations
Section 1.163-8
Although interpretative regulations are entitled to considerable weight, they are accorded less deference than legislative regulations, which are issued under a specific grant of authority to address a matter raised by the relevant statute.
An interpretative regulation is to be upheld if it "'implement[s] the congressional mandate in some reasonable manner.'"
Under the formulation now familiar, when we confront an expert administrator's statutory exposition, we inquire first whether "the intent of Congress is clear" as to*86 "the precise question at issue."
*69 (2) Silence or Ambiguity
As set forth supra, the relevant inquiry in the instant case is whether petitioners' interest on their 1987 income tax underpayment is "properly allocable to a trade or business".
We have concluded (supra F (5) Conclusions From the Statute and the History of the Legislation) that the statutory text does not on its face provide the answer to the question before us. By choosing to use a definition different from the statutory phrases we had earlier construed, the Congress apparently intended a meaning different from the meaning of those earlier statutory phrases, but the statutory text does not reveal specifically what that difference is. The history of the legislation provides some support for a specific answer, but that support is rebuttable.
Every Court of Appeals which has addressed the issue presented herein has reached the same conclusion that the statute is silent or ambiguous.
We conclude that
(3) Permissible Construction
To be valid, a regulation need not be the only, or even the best, construction of the statute it purports to implement.
need not conclude that the agency construction was the only one it permissibly could have adopted to uphold the construction, or even the reading the court would have reached if the question initially had arisen in a judicial proceeding. [
Rather, the reviewing court need only conclude that the regulation is reasonable.
(a)
Section 1.163-8
Expenses allocable to portfolio income. -- The conference agreement provides that portfolio income is reduced by the deductible expenses (other than interest) that are clearly and directly allocable to such income. Properly allocable interest expense also reduces portfolio income. Such deductions accordingly are not treated as attributable to a passive activity.
The conferees anticipate that the Treasury will issue regulations setting forth standards for appropriate allocation of expenses and interest under the passive loss rule. The*91 conferees anticipate that regulations providing guidance to taxpayers with respect to interest allocation will be issued by December 31, 1986. These regulations should be consistent with the purpose of the passive loss rules to prevent sheltering of income from personal services and portfolio income with passive losses. Moreover, the regulations *71 should attempt to avoid inconsistent allocation of interest deductions under different Code provisions. 4
In the case of entities, a proper method of allocation may include, for example, allocation of interest to portfolio income on the basis of assets, although there may be situations in which tracing is appropriate because of the integrated nature of the transactions involved. Because of the difficulty of
*92 recordkeeping that would be required were interest expense of individuals allocated rather than traced, it is anticipated that, in the case of individuals, interest expense generally will be traced to the asset or activity which is purchased or carried by incurring or continuing the underlying indebtedness.
The Congress's suggestion, however, specifically related to the allocation rules for
An examination of section 1.163-8
In sum, the Congress suggested the means by which to allocate interest expense for purposes of
In addition to providing rules for the allocation of interest expense, section 1.163-8
As previously noted,
*73 (b)
As applied to the instant case,
The Joint Committee staff summary, which we did not consider in
We acknowledge that the Joint Committee staff summary is not the official legislative document for the conference committee's decisions about TRA 1986; that distinction is accorded the*97 conference committee report. Joint Committee staff summary at XIII. Further, by definition, the Joint Committee staff summary may not be a complete or thorough statement of the conference decisions; summaries are designed to cover concisely the main points of the summarized topic, and they may lack specific detail. However, the Joint Committee staff summary was provided to the Members of the House and Senate for their reference before Congress enacted TRA 1986, and consequently it is part of the history of the legislation. See, e.g.,
*74 Although not as clearly expressed as in the Joint Committee staff summary, the relevant portions of the Joint Statement of Managers portion of the conference committee report may be read to echo the views expressed in the Joint Committee staff summary. The relevant portions of the Joint Statement of Managers portion of the conference committee report provide that "Personal*98 interest also generally includes interest on tax deficiencies" and that "personal interest does not include * * * interest payable on estate tax deferred under sec. 6163 or 6166." H. Conf. Rept. 99- 841, at II-154, supra, 1986-3 C.B. (Vol. 4) at 154. These portions of the Joint Statement of Managers Portion of the conference committee report may be read to support a view that interest on all tax underpayments other than interest in respect of estate tax deferred under either section 6163 or 6166 is to be treated as personal interest.
Although the Joint Statement of Managers portion of the conference committee report does not speak as clearly to the issue before us as the Joint Committee staff summary does, one may reasonably view these two pieces of legislative history as being consistent with one another. At the very least, in light of the Joint Committee staff summary, and the validation of
We reached the opposite conclusion in
Personal interest also includes interest on underpayments of individual Federal, State or local income taxes notwithstanding that all or a portion of the income may have arisen in a trade or business, because such taxes are not considered derived from the conduct of a trade or business. 60*75 However, personal interest does not include interest payable on estate tax deferred under sections 6163 or 6166.
*100 The above quoted portion of the 1986 Blue Book clearly supports
In
Whether one views the legislative history of
We have concluded that
Alternatively, petitioners contend that
As we stated in
The amended language, effective for the years in issue, was intended to conform the definition of personal interest to the language of the related passive loss and investment interest limitation provisions, to permit consistent application of a standard for allocation of interest. See S. Rept. 100-445, at 36 (1988); H. Rept. 100-795, at 35 (1988). There is no indication that the change in language was intended to make any substantive change in the meaning of the statutory language.
We hold for respondent on this issue.
Decision will be entered for respondent.
Reviewed by the Court.
COHEN, WHALEN, HALPERN, BEGHE, and MARVEL, JJ., agree with the majority*103 opinion.
GERBER, CHIECHI, and GALE, JJ., concur.
FOLEY, J., did not participate in consideration of this case.
Appendix
History of the Legislation
(1) The Treasury Report
In November 1984, the Treasury Department issued a report to the President entitled "Tax Reform for Fairness, Simplicity, and Economic Growth", hereinafter sometimes referred to as the Treasury Report. In the Treasury Report, *77 the Treasury Department explained that under then-governing law, all interest expense was "deductible, either as a business or investment expense or as an itemized deduction." The Treasury Report at 83. To
curtail the subsidy implicit in the [then] current law deduction for interest on debt to finance large amounts of passive, tax-preferred, investment assets (such as corporate stock) or extraordinary consumption expenditures (such as second homes).
the Treasury Department proposed to limit the deductions individuals could claim for interest expense "to the sum of mortgage interest on the principal residence of the taxpayer, passive investment income (including*104 interest income), and $ 5,000 per return." Id.
(2) The President's Proposals
In May 1985, President Reagan issued a report entitled "The President's Tax Proposals to the Congress for Fairness, Growth, and Simplicity", hereinafter sometimes referred to as the President's Proposals. Chapter 13.01 of the President's Proposals addressed interest deductions and proposed to subject, inter alia, "all interest not incurred in connection with a trade or business" to the then governing limitation on the deduction of investment interest under
(3) The House Bill
Subsection (d) of
*78 SEC. 402. LIMITATION ON DEDUCTION FOR NONBUSINESS INTEREST.
(a) General Rule. -- Subsection (d) of
"(d) Limitation on Nonbusiness Interest. --
"(1) In general. -- In the case of a taxpayer other than a corporation, the amount allowed as a deduction under this chapter for nonbusiness interest for any taxable year shall not exceed the sum of --
"(A) $ 10,000 ($ 20,000, in the case of a joint return), plus
"(B) the net investment income for the taxable year.
"In the case of a trust, the amount specified in subparagraph (A) shall be zero.
*106 * * * * * * *
"(3) Nonbusiness interest. -- For purposes of this subsection, the term 'nonbusiness interest' means any interest allowable as a deduction under this chapter (determined without regard to paragraph (1)); except that such term shall not include --
"(A) any qualified residence interest, and
"(B) any interest which is allowable as a deduction in computing adjusted gross income and which is not attributable to a limited business interest.
For purposes of the preceding sentence, the term 'interest' includes any amount allowable as a deduction in connection with personal property used in a short sale.["]
The term "limited business interest" is defined (in subsec. (d)(6)) in terms of lack of active participation in the business; it apparently would not apply to*107 Edward's law practice. As to the prior law's deductibility of interest in computing adjusted gross income, see infra F. (3) Pre-TRA 1986 Cases.
The Ways and Means Committee Report to accompany H.R. 3838, H. Rept. 99-426 (1985), 1986-3 C.B. (Vol. 2) 1, states, in pertinent part, as follows:
B. Interest Deduction Limitations (Sec. 402 of the bill and sec.
163(d) of the Code)
Present Law
In general
* * * * * * *
Under present law, no limitation is imposed under
* * * * * * *
Explanation of Provision
In general
The bill expands the scope of the interest limitation, and alters the calculation of the amount of the limitation. Under the bill, all nonbusiness*108 interest is subject to the limitation on deductibility, including consumer interest and certain interest that is not treated as investment interest subject to limitation under present law. Nonbusiness interest subject to the limitation under the bill does not include interest on debt secured by the taxpayer's principal residence (to the extent of its fair market value), and interest on debt secured by a second residence of the taxpayer (to the extent of its fair market value). Interest expense that is paid or incurred in carrying on a trade or business (except for interest attributable to certain limited business interests not involving low- income housing), is not subject to the interest deduction limitation under the bill. [
* * * * * * *
Interest subject to the limitation
Under the bill, interest subject to the limitation is all interest on debt not incurred in connection with the taxpayer's trade or business, other than debt secured by the taxpayer's residences (as described above). Thus, interest subject to*109 limitation generally includes investment interest subject to the
The House of Representatives passed H.R. 3838 without amendment to section 402 of H.R. 3838 as reported by the Ways and Means Committee.
(4) The Senate's Amendment
H.R. 3838 was received in the Senate on December 18, 1985, and referred to the Finance Committee. Section 1421 of H.R. 3838 as reported by the Finance Committee separated the above-noted considerations -- investment interest and "consumer" interest. Section 1421(b) of the Finance Committee's amendment revised
*80 SEC. 1421. LIMITATIONS ON DEDUCTION FOR NONBUSINESS INTEREST.
(a) Disallowance of Deduction*110 for Consumer Interest of Individuals. --
"(h) Disallowance of Deduction for Consumer Interest. --
"(1) In general. -- In the case of a taxpayer other than a corporation, no deduction shall be allowed under this chapter for consumer interest paid or accrued during the taxable year.
"(2) Consumer interest. -- For purposes of this subsection --
"(A) In general. -- The term 'consumer interest' means any interest allowable as a deduction under this chapter other than interest paid or accrued on indebtedness incurred or continued in connection with--
"(i) the conduct of a trade or business (other than the trade or business of performing services*111 as an employee), or
"(ii) an activity described in section 212.
"(B) Exception for qualified residence interest. -- The term 'consumer interest' shall not include any qualified residence interest.["]
The Senate Finance Committee report, provides, in pertinent part, as follows (S. Rept. 99-313, at 802-806 (1986), 1986- 3 C.B. (Vol. 3) 1, 802-806):
G. Interest Deduction Limitations (sec. 1421 of the bill and
Present Law
* * * * * * *
Other interest
Under present law, no limitation is imposed under
*112 Reasons for Change
* * * * * * *
Nonbusiness (consumer) interest
* * * * * * *
Although the committee believes it would not be advisable to subject to income tax imputed rental income with respect to consumer durables owned by the taxpayer, it does believe that it is appropriate and practical to address situations where consumer expenditures are financed by borrowing. By phasing out the present deductibility of consumer interest, *81 the committee believes that it has eliminated from the present tax law a significant disincentive to saving.
* * * * * * *
Explanation of Provisions
In general
The bill expands the scope of the interest limitation, and alters the calculation of the amount of the limitation. Under the bill, all nonbusiness interest is subject to the limitation on deductibility, including consumer interest and certain interest that is not treated as*113 investment interest subject to limitation under present law. Interest subject to the limitation under the bill does not include interest on debt secured by the taxpayer's principal residence (to the extent of its fair market value), and interest on debt secured by a second residence of the taxpayer (to the extent of its fair market value). Interest expense that is paid or incurred in carrying on a trade or business is not subject to the interest deduction limitation under the bill (except for interest attributable to certain limited business interests).
In general, under the bill, consumer interest is not deductible, and the deduction for investment interest is limited to investment income for the year with an indefinite carryforward of disallowed investment interest.
Investment interest limitation
Interest subject to the limitation. -- Under the bill, interest subject to the investment interest limitation is all interest (other than consumer interest and qualified residence interest) on debt not incurred in connection*114 with the taxpayer's trade or business. * * *
* * * * * * *
Consumer interest limitation
Under the bill, consumer interest is not deductible. Consumer interest generally includes all interest not incurred or continued in connection with the conduct of a trade or business (other than the performance of services as an employee) * * *. Thus, consumer interest includes, for example, interest on a loan to purchase an automobile for personal use, and credit card interest incurred for personal expenses.
In all material respects, section 1421 of H.R. 3838 as passed by the Senate on June 24, 1986, was identical to section 1421 of H.R. 3838 as reported by the Senate Finance Committee.
Section 1401 of the Senate amendment as reported by the Finance Committee proposed to add a new section,
Section 1401 of the Senate amendment to H.R. 3838 as reported by the Finance Committee provides, in pertinent part, as follows:
* * * * * * *
(h) Regulations. -- The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out provisions of this section, including regulations --
(1) which specify what constitutes an activity or material participation for purposes of this section,
(2) which provide that certain items of*116 gross income will not be taken into account in determining income or loss from any activity (and the treatment of expenses allocable to such income), and
(3) if necessary to prevent avoidance of this section, determining whether income, gain, or loss from a limited partnership or other passive activity is treated as described in subsection (c)(3).
The Finance Committee report on H.R. 3838 did not explain how the regulations promulgated under
Section 1401 of the Senate amendment to H.R. 3838 was amended by a floor amendment and passed; the amendment did not affect the above quoted language. 132 Cong. Rec. S 8817, S 8915-8916 (June 26, 2986); Joint Committee on Taxation, Comparison of Tax Reform Provisions of H.R. 3838 as passed by the House and Senate (JCS-15- 86), 52 (July 15, 1986).
(5) The Conference Committee
On August 29, 1986, the staff of the Joint Committee on Taxation published a pamphlet (hereinafter*117 sometimes referred to as the Joint Committee staff summary) described as follows (Joint Committee staff summary at xiii):
This pamphlet 1 provides a title-by-title summary of the principal provisions of H.R. 3838 (Tax Reform Act of 1986), as agreed to by the House-*83 Senate Conferees on August 16, 1986. As a general rule, this pamphlet does not describe agreements of the Conferees not to adopt a particular provision that was only in the House-passed bill or only in the Senate-passed bill, i. e., agreements to retain present law on particular issues.
This pamphlet is provided for the use of the Members of the House and the Senate. The official legislative document on the conference decisions on H.R. 3838 will be the conference report
*118 on the bill (including the Statement of Managers explaining the conference decisions).
The Joint Committee staff summary describes the relevant portion of the conference agreement as follows:
C. Interest Deduction LimitationNo deduction is allowed for personal interest such as interest on car loans or credit card balances for personal expenditures). Interest on underpayments of tax (other than certain deferred estate taxes) is treated as personal interest under the provision. * * * [Joint Committee Summary at 18.]
The conference committee report (H. Conf. Rept. 99-841, supra, 1986-3 C.B. (Vol. 4) 1) was published on September 18, 1986. Section 511 of the conference committee report corresponds to section 1421 of H.R. 3838 as passed by the Senate. In large part, section 511(b) of the conference committee report tracks section 1421(a) of H.R. 3838 as passed by the Senate. Section 511(b) of the conference committee report presents a new
(h) Disallowance of Deduction for Personal Interest. --
(1) In general. -- *119 In the case of a taxpayer other than a corporation, no deduction shall be allowed under this chapter for personal interest paid or accrued during the taxable year.
(2) Personal interest. -- For purposes of this subsection, the term "personal interest" means any interest allowable as a deduction under this chapter other than --
(A) interest paid or accrued on indebtedness incurred or continued in connection with the conduct of a trade or business (other than the trade or business of performing services as an employee),
(B) any investment interest (within the meaning of subsection (d)),
(C) any interest which is taken into account under
(D) any qualified residence interest (within the meaning of paragraph (3)), and
*84 *120 (E) any interest payable under
The Joint Statement of Managers portion of the conference committee report provides, in pertinent part, as follows:
House Bill
Under the House bill, the deduction for nonbusiness intrest of noncorporate taxpayers is limited to $ 10,000 ($ 20,000 for joint returns), plus net investment income, plus certain deductible expenditures in excess of rental income from net lease property. * * *
* * * * * * *
Nonbusiness interest means all interest not incurred in the taxpayer's trade or business, including the taxpayer's share of interest of S corporations in whose management he does not actively participate, the taxpayer's share of interest expense
*121 of limited partnerships in which he is a limited partner, and the taxpayer's share of interest expense of certain trusts and other entities in which he is a limited entrepreneur.
* * * * * * *
Senate Amendment
The Senate amendment provides that the deduction for investment interest of noncorporate taxpayers is limited to net investment income, plus certain deductible expenditures in excess of rental income from net lease property. Consumer interest is not deductible. Interest on debt secured by the taxpayer's principal residence and a second residence of the taxpayer (to the extent of their fair market values) is not subject to limitation.
* * * Consumer interest means interest not attributable to a trade or business (other than the trade or business of performing services as an employee) or to an activity engaged in for profit.
* * * * * * *
Conference Agreement
*122 The conference agreement follows the Senate amendment, with modifications and clarifications.
* * * * * * *
Personal interest
The conference agreement follows the Senate amendment provision with respect to consumer interest (denominated personal interest under the conference agreement), with modifications and clarifications.
Under the conference agreement, personal interest is not deductible. Personal interest is any interest, other than interest incurred or continued *85 in connection with the conduct of a trade or business (other than the trade or business of performing services as a employee), investment interest, or interest taken into account in computing the taxpayer's income or loss from passive activities for the year. Personal interest also generally includes interest on tax deficiencies.
Personal interest does not include qualified residence interest of the taxpayer, nor does it include interest payable on estate tax deferred under*123 sec. 6163 or 6166. [H. Conf. Rept. 99-841, at II-151 to II-154, supra, 1986-3 C.B. (Vol. 4) at 151-154.]
In all material respects, section 511(b) as reported by the conference committee was identical to section 511(b) of H.R. 3838 as ultimately enacted, on October 22, 1986. TRA 1986 sec. 511(b), Pub. L. 99-514, 100 Stat. 2085, 2246-2248, 2963.
The conference agreement on H.R. 3838 generally follows section 1401 of the Senate amendment, relating to limitations on losses and credits from passive activities, but with certain modifications and clarifications. H. Conf. Rept. 99-841, at II- 138, supra, 1986-3 C.B. (Vol. 4) at 138. As modified, clarified, and enacted,
* * * * * * *
(k) Regulations. -- The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out provisions of this section, including regulations --
* * * * * * *
(4) which provide for the determination*124 of the allocation of interest expense for purposes of this section * * *. 1 [TRA 1986 sec. 501(a), Pub. L. 99-514, 100 Stat. 2085, 2233, 2240.]
The Joint Statement of Managers portion of the conference committee report explaining interest expense allocation under
Expenses allocable to portfolio income. -- The conference agreement provides that portfolio income is reduced by the deductible expenses (other than interest) that are clearly and directly allocable to such income. Properly allocable interest expense also reduces portfolio income. Such deductions accordingly are not treated as attributable to a passive activity.
*86 The conferees anticipate that the Treasury will issue regulations setting forth standards for appropriate allocation of expenses and interest under the passive loss rule. The conferees anticipate that regulations providing guidance to taxpayers with respect to interest allocation will be issued by December 31, 1986. These regulations should be consistent with
*125 the purpose of the passive loss rules to prevent sheltering of income from personal services and portfolio income with passive losses. Moreover, the regulations should attempt to avoid inconsistent allocation of interest deductions under different Code provisions. 4
In the case of entities, a proper method of allocation may include, for example, allocation of interest to portfolio income on the basis of assets, although there may be situations in which tracing is appropriate because of the integrated nature of the transactions involved. Because of the difficulty*126 of recordkeeping that would be required were interest expense of individuals allocated rather than traced, it is anticipated that, in the case of individuals, interest expense generally will be traced to the asset or activity which is purchased or carried by incurring or continuing the underlying indebtedness.
(6) 1986 Blue Book
On May 4, 1987, the staff of the Joint Committee on Taxation published its General Explanation of the Tax Reform Act of 1986 (1986 Blue Book), which states in pertinent part as follows (pp. 262-264, 266):
C. Interest Deduction Limitations (Sec. 511 of the Act and
*127 Prior Law
* * * * * *
Other interest
Under prior law, no limitation was imposed under
*87 Reasons for Change
* * * * * * *
Personal interest
Prior law excluded or mismeasured income arising from the ownership of housing and other consumer durables. Investment in such goods allowed consumers to avoid the tax that would apply if funds were invested in assets producing taxable income and to avoid the cost of renting these items, a cost which would not be deductible in computing tax liability. Thus, the tax system
*128 under prior law provided an incentive to invest in consumer durables rather than assets which produce taxable income and, therefore, an incentive to consume rather than save.
* * * * * * *
Explanation of Provisions
In general
In general, under the Act, personal interest is not deductible, and the deduction for investment interest is limited to investment income for the year with an indefinite carryforward of disallowed investment interest. The personal interest limitation does not apply to interest on debt secured by the taxpayer's principal residence (to the extent of its basis plus the amount of such debt used to pay certain educational or medical expenses) and interest on debt secured by a second residence of the taxpayer (to the extent of its basis plus the amount of such debt used to pay certain educational or medical expenses), provided the total amount of such debt does not exceed the fair market value of such residence.
*129 * * * * * * *
Personal interest
Under the Act, personal interest is not deductible. Personal interest is any interest, other than interest incurred or continued in connection with the conduct of a trade or business (other than the trade or business of performing services as an employee), * * * investment interest, or interest taken into account of computing the taxpayer's income or loss from passive activities for the year. Thus, personal interest includes, for example, interest on a loan to purchase an automobile, interest on a loan to purchase a life insurance policy, and credit card interest, where such interest is not incurred or continued in connection with the conduct of a trade or business. Personal interest also includes interest on underpayments of individual Federal, State or local income taxes notwithstanding that all or a portion of the income may have arisen in a trade or business, because such taxes are not considered derived from the conduct of a trade or business. 60 However, personal interest does*130 not include interest payable on estate tax deferred under sections 6163 or 6166.
Personal interest does not include qualified residence interest of the taxpayer, as discussed below.
*88 (7) TAMRA*131 1988
On June 10, 1987, the Technical Corrections Act of 1987 was introduced in the House of Representatives (H.R. 2636) by Ways and Means Committee Chairman Rostenkowski and Congressman Duncan, and in the Senate (S. 1350) by Finance Committee Chairman Bentsen and Senator Packwood. Section 105(c) of the bills provided as follows:
SEC. 105. AMENDMENTS RELATED TO TITLE V OF THE REFORM ACT. [The Tax Reform Act of 1986, see sec. 1(b)( 2) of the bills.]
* * * * * * *
(c) Amendments Related to Section 511 of the Reform Act. --
(1) Subparagraph (A) of
* * * * * * *
(4) Subparagraph (A) of
Section 119 of the bills provided that these amendments "shall take effect as if included in the provision of the Reform Act to which such amendment relates."
*89 On June 15, 1987, the staff of the Joint Committee on Taxation released its Description of the Technical Corrections Act of 1987 (H.R. 2636 and S. 1350) (JCS-15-87), June 15, 1987. At pages 25 and 26, this staff pamphlet describes the above amendments as follows:
Explanation of Provisions
Investment interest. -- The bill conforms the language of the definition of investment interest to the language of a related provision that allocates interest expense to portfolio income under the passive loss rule. Thus, under the bill, investment interest is that which is properly allocable to property held for investment. This change results in consistency in the language of the provisions allocating interest expense to the category of investment interest, and permits consistent application of a standard for allocation of interest. This change*133 is not intended to suggest the adoption of any particular method of allocation, but rather to give Treasury the ability to devise allocation rules as simple as possible consistent with the objectives of the provision.
* * * * * * *
Personal interest. -- The bill conforms the language of the definition of personal interest to the language of related provisions (the passive loss rule and the investment interest limitation) under which interest expense may be allocated. Thus, the bill provides that personal interest does not include interest that is properly allocable to a trade or business. This change results in consistency in the language of several significant provisions under which interest is likely to be allocated, and permits consistent application of a standard for allocation of interest.
As amended, the provisions of the House bill were included as Subtitle B of Title X (Revenue Provisions) of the Omnibus Budget Reconciliation Act of 1987 (H.R. 3545) as passed by the House in October 1987. H. Rept. 100-795, at*134 2. Paragraphs (1) and (4) of section 10205(c) of the House-passed H.R. 3545 are identical to the language of paragraphs (1) and (4) of section 105(c) of H.R. 2636 set forth supra. The description of the amendment to the definition of "personal interest" in the House Budget Committee's report (the committee report for H.R. 3545) is identical to the description of the amendment in the staff pamphlet describing section 105(c)(4) of H.R. 2636 as introduced, set forth supra. H. Rept. 100-391, at 1171 (1987). The report's description of the amendment to the definition of "investment interest" adds to the description in the staff pamphlet describing section 105(c)(1) of H.R. 2636 as introduced, set forth supra.
Explanation of Provisions
Investment interest. -- The bill conforms the language of the definition of investment interest to the language of a related*135 provision that allocates interest expense to portfolio income under the passive loss rule. Thus, under the bill, investment interest is that which is properly allocable to property held for investment. This change results in consistency in the language of the provisions allocating interest expense to the category of investment interest, and permits consistent application of a standard for allocation of interest. This change is not intended to suggest that the adoption of any particular method of allocation is required, but rather to give Treasury the ability to devise allocation rules as simple as possible consistent with the objectives of the provision. The committee believes that the Treasury should consider rules relating to the securing of property to mitigate some of the complexities of tracing where simplicity is desirable, so that, for example, any interest on a loan secured by personal use property could be considered personal interest, and any interest on a loan secured by investment assets could be considered investment interest.*136 [H. Rept. 100-391, at 1170 (1987); emphasis added.]
On December 4, 1987, Senate Budget Committee Chairman Chiles reported S. 1920 to the Senate; part II of subtitle B of title IV of S. 1920 as reported relates to technical amendments to TRA 1986. Paragraphs (1) and (4) of section 4665(c) of S. 1920 as reported are identical to the language of paragraphs (1) and (4) of section 105(c) of S. 1350 as introduced, set forth supra. The paragraph of the document explaining the bill's (S. 1920) amendment to the definition of "investment interest" as reported, except for two typographical errors, is identical to the corresponding paragraph of the House report, set forth supra. Reconciliation *91 Submissions of the Instructed Committees Pursuant to the Concurrent Resolution on the Budget for Fiscal Year 1988 (H. Con. Res. 93, Rept. 100-76), Senate Budget Committee, 100th Cong., 1st Sess. at 272. The paragraph of the document explaining the bill's (S. 1920) amendment to the definition of " personal interest" is identical to both the corresponding paragraph in the House report and the staff pamphlet describing the provision in S. 1350 as introduced, set forth supra. Reconciliation Submissions*137 of the Instructed Committees Pursuant to the Concurrent Resolution on the Budget for Fiscal Year 1988 (H. Con. Res. 93, Rept. 100-76), Senate Budget Committee, 100th Cong., 1st Sess. at 272.
As a result of a budget summit with the White House, the technical corrections were taken out of the budget reconciliation bill for 1987. H. Rept. 100-495, at 1014 (1987), 1987-3 C.B. at 294; 133 Cong. Rec. 34899 (Dec. 10, 1987) (colloquy between Finance Committee Chairman Bentsen and Senator Cranston.) The Senate then considered S. 1920, and, after completing work on floor amendments, called up the House-passed bill (H.R. 3545), substituted the text of S. 1920 as amended, and asked for a conference. 133 Cong. Rec. 34935 (Dec. 10, 1987). The Senate-passed amendment to H.R. 3545 did not include the technical corrections in S. 1920 and they were not included in the bill as enacted. S. Rept. 100-445 at 3.
On March 31, 1988, the Technical Corrections Act of 1988 was introduced in the House of Representatives (H.R. 4333) by Ways and Means Committee Chairman Rostenkowski and Congressman Duncan, and in the Senate (S. 2238) by Finance Committee Chairman Bentsen and Senator Packwood. Paragraphs*138 (1) and (4) of section 105(c) of the bills were identical to paragraphs (1) and (4) of section 105(c) of H.R. 2636 and S. 1350 as introduced on June 10, 1987, set forth supra.
Section 121 of the bills (H.R. 4333 and S. 2238) provided that these amendments "shall take effect as if included in the provision of the Reform Act to which such amendment relates."
On April 6, 1988, the staff of the Joint Committee on Taxation released its Description of the Technical Corrections Act of 1988 (H.R. 4333 and S. 2238) (JCS-10-88), March 31, 1988. At pages 34 and 35, the staff pamphlet descriptions of the above amendments are identical to the committee report explanations of the same amendments to the definitions of "investment interest" and "personal interest" as proposed in 1987, set forth supra.
On July 26, 1988, the Ways and Means Committee reported H. R. 4333 with an amendment that replaced the entire text of the introduced bill. H. Rept. 100-795, at 1 (1988). Paragraphs (1) and (4) of section 105(c) of the *92 Committee's amendment are identical to the introduced bill's language and to paragraphs (1) and (4) of section 105(c) of H.R. 2636 and S. 1350 as introduced on June 10, 1987, set forth*139 supra. The Committee's report states, in pertinent part, as follows (H. Rept. 100-795, at 3 (1988)):
II. EXPLANATION OF THE BILLTITLE I. -- TECHNICAL CORRECTIONS TO THE TAX REFORM ACT OF 1986
The technical correction titles (Title I and Title II) [2] contain clerical, conforming and clarifying amendments to the provisions enacted by the Tax Reform Act of 1986 (P. L. 99-514) and other recently enacted legislation. All amendments are [sic] made by these titles are meant to carry out the intent of Congress in enacting the original legislation. Therefore, no separate "Reasons for Change" is set forth for each individual amendment. Except as otherwise described, the amendments made by the technical correction titles will take effect as if included in the original legislation to which each amendment relates.
The report's descriptions of the amendments to the definitions of "investment interest" and "personal interest" are identical to the descriptions in the staff pamphlet describing the*140 introduced bill which are identical to the 1987 committee report descriptions of the same amendments, set forth supra. H. Rept. 100-795, at 34, 35 (1988).
On August 3, 1988, the Finance Committee reported S. 2238 with an amendment that replaced the entire text of the introduced bill. S. Rept. 100-445, at 1 (1988). Paragraphs (1) and (4) of section 105(c) of the Committee's amendment are identical to the introduced bill's language and to paragraphs (1) and (4) of section 105(c) as introduced in 1987 in H.R. 2636 and S. 1350, set forth supra. The first paragraph of the Committee report's explanation of the bill is identical to the corresponding paragraph of the Ways and Means Committee's report which is identical to the Committee report explanations of the same amendment as introduced on June 10, 1987 in H.R. 2636 and S. 1350, set forth supra. 3 S. Rept. 100-445, at 4 (1988).
*93 The Finance Committee report's descriptions of the*141 amendments to the definitions of "investment interest" and "personal interest" are identical to the descriptions in the staff pamphlet describing the introduced bill which are identical to the 1987 committee report explanations of the same amendments, set forth supra.
The Senate considered S. 2238 and, after completing work on floor amendments, called up the House-passed bill (H.R. 4333), substituted the text of S. 2238 as amended, passed H.R. 4333 as so amended, and asked for a conference. 134 Cong. Rec. 29792 (Oct. 11, 1988). The House and Senate amendments to the investment interest and personal interest definitions being identical, they were approved without further explanation by the conference committee. H. Conf. Rept. 100-1104, Vol. I at 53, 54, Vol. II at 2 (1988),
The above-described amendments were enacted by paragraphs (1) and (4) of section 1005(c) of the Technical and Miscellaneous Revenue Act of 1988 (TAMRA 1988), Pub. L. 100-647, 102 Stat. 3342, 3390; by section 1019(a) of that Act they took effect*142 as if included in the respective TRA 1986 provisions. TAMRA 1988 sec. 1019(a), 102 Stat. at 3593. FOOTNOTES TO APPENDIX
Sec. 10212(a) of the Omnibus Budget Reconciliation Act of 1987, Pub. L. 100-203, 101 Stat. 1330, 1330-405, redesignated
2 The Ways and Means Committee's amendment added titles III (Substantive Tax Provisions) and IV (Ways and Means Subcommittee Provisions), and changed the short title of the bill (sec. 1(a)) to Miscellaneous Revenue Act of 1988.
*143 3 The Finance Committee's amendment added titles III (Corrections to Collection and Exemption Procedures for Excise Taxes on Diesel and Nongasoline Aviation Fuels), IV (Other Corrections and Modifications), V (Railroad Unemployment and Retirement Amendments), and VI (Social Security Act Amendments), but did not change the short title of the bill (sec. 1(a)).
* * * *
CONCURRENCE OF JUDGE RUWE
RUWE, J., concurring: I agree with the result reached by the majority; however, I cannot agree with the majority's suggestion that the personal nature of the underlying income tax deficiency and the related interest plays no role in determining the validity of
* * * *
CONCURRENCE OF JUDGE THORNTON
THORNTON, J., concurring: I am concerned that the majority opinion may contribute to confusion over the interpretive weight this Court will accord nonauthoritative congressional staff materials.
In its analysis, the majority opinion relies heavily on certain language appearing in the Joint Committee on Taxation General Explanation of the Tax Reform Act of 1986 (the Blue Book). In
Where there is no corroboration in the actual legislative history, we shall not hesitate to disregard the General Explanation [of the Blue Book] as far as congressional intent is concerned. * * * Given the clear thrust of the conference committee report, the General Explanation [of the Blue Book] is without foundation and must fall by the wayside. To conclude otherwise would elevate it to a status and accord it a deference to which it simply is not entitled.
Other opinions of this Court echo the notion that we require some direct corroboration of congressional intentions before we defer to Blue Book expressions thereof. See
The majority opinion's reliance on the Blue Book in overturning this Court's decision in
*95 First, to the extent the majority opinion purports to find corroboration for the Blue Book language in a Joint Committee staff summary "published" during the conference on the 1986 Act (and not expressly considered in this Court's Redlark opinion), it is unsatisfactory. The Joint Committee staff summary is scarcely more reliable an indicator of congressional intentions than the Blue Book itself. Like the Blue Book, the Joint Committee summary was a staff-generated document; it was released as a committee print rather than as a report; there is no indication that any Member of Congress approved it during consideration of the 1986 Act. A mere proliferation (or more precisely, a mere doubling up) of staff- *147 generated materials cannot supply the want of direct evidence of congressional intentions.
Second, to the extent the majority opinion means to repudiate the views of this Court as expressed in Redlark and other opinions, requiring some direct corroboration of Blue Book expressions of congressional intentions, it raises significant questions about the standard this Court now intends to apply in assessing the interpretive weight to accord materials like the Blue Book that technically are not part of the legislative history. The only express clue provided by the majority opinion appears in its statement that "if a Blue Book were to conflict with enacted language or controlling legislative history, then the statutory language or the controlling legislative history would prevail." Majority op. p. 35. This statement might be construed as suggesting that, even in the absence of direct corroboration in the statute or other controlling legislative materials, a Blue Book explanation will be considered as controlling unless it actually conflicts with these materials. Any such suggestion is troublesome. As has been observed elsewhere, there should be no "one generic standard for assessing the*148 Blue Book's authority"; rather, the "Blue Book's interpretative weight depends, in large measure, on the role it is performing." Livingston, "What's Blue and White and Not Quite as Good as a Committee Report: General Explanations and the Role of 'Subsequent' Tax Legislative History",
Third, the stark divergence between this Court's analysis in Redlark, where we felt compelled to disregard the Blue Book language altogether, and in the majority opinion, which appears to treat it as a substantial component of its analysis, might be thought to largely account for the different results then and now. As demonstrated, however, by the decisions of the five courts of appeal to address this issue, which have coalesced around a straightforward analysis of judicial deference to agency actions, the Blue Book language (with*149 or without the Joint Committee summary) is not dispositive of the validity of the Treasury regulations (which is, after all, the issue before us). Rather, the Treasury regulations are ultimately validated as reasonably interpreting a facially ambiguous statute. The Blue Book language in question, while supportive of this result, is not essential to it. By unduly elevating the Blue Book's role in our analysis, we risk giving encouragement to inventive counsel in future cases to troll deeply for other types of noncontrolling legislative materials that might be argued to betoken congressional intent.
GERBER and GALE, JJ., agree with this concurring opinion.
* * * * *
DISSENT OF JUDGE WELLS
WELLS, C. J., dissenting: I respectfully dissent from the majority's refusal to follow
The majority contends that the language of
*97
(1) In general. -- In the case of a taxpayer other than a corporation, no deduction shall be allowed under this chapter for personal interest paid or accrued during the taxable year.
(2) Personal interest. -- For purposes of this section, the term "personal interest" means any interest allowable as a deduction under this chapter other than --
(A) interest paid or accrued on indebtedness properly allocable to a*151 trade or business (other than the trade or business of performing services as an employee).
etitioners contend that they should be permitted to deduct interest paid on a deficiency arising from disallowed Schedule C deductions relating to a sole proprietorship, a law firm.
Although
The intent of Congress is best determined by examining the language of the statute.
Congress also provided some indication of what constitutes interest "properly allocable" to trade or business in section 469(e), relating to the passive activity loss rules. The meaning of "properly allocable" may be determined by looking at adjoining words and phrases.
Sec. 469(e) Special Rules for Determining Income or Loss From a Passive Activity. -- For purposes of this section --
(1) Certain income not treated as income from passive activity. -- In determining the income or loss from any activity. --
(A) In general. -- There shall not be taken into account --
(i) any --
* * * * * * *
(II) expenses (other than*154 interest) which are clearly and directly allocable to such gross income, and
(III) interest expense properly allocable to such gross income * * *
In 1986, section 469(e) was enacted concurrently with
When Congress enacted section 469(e) and later amended
Case law prior to the enactment of
Congress is considered to be aware of these cases and the decisions existing before enactment of legislation.
The majority contends that Standing, Polk, and Reise were rendered ineffective by the passage of
Congress did not express any intention to overturn Standing, Polk, and Reise, in the conference committee reports or elsewhere in the legislative history of the Tax Reform Act of 1986 (1986 TRA), Pub. L. 99-514, sec. 501, 100 Stat. 2233. Standing, Polk, and Reise, were based on statutory language which permitted a deduction for interest if it arose "in carrying on a trade or business" and "attributable to" the taxpayer's trade or business. See
In Russello, the Supreme Court analyzed the substantive differences between the two provisions in question.
Moreover, it is not necessarily clear that the pre-1986 TRA language is substantively different from the 1986 TRA language and the 1988 TAMRA language. The*159 argument that a simple change indicates a different meaning seems to fail in the context of 1986 TRA and 1998 TAMRA, where Congress replaced "interest paid or accrued on indebtedness incurred or continued in connection with the conduct of a trade or business" in
The majority concludes that the language of
The Joint Statement of Managers of the Conference Report, H. Conf. Rept. 99-841, at II-151 to II-154 (1986), 1986-3 C.B. (Vol. 4) 154, published September 18, 1986 (Conference Committee Report), provides:
Under the conference agreement, personal interest*160 is not deductible. Personal interest is any interest, other than interest incurred or continued in connection with the conduct of a trade or business (other than the trade or business of performing services as a employee), investment interest, or interest taken into account in computing the taxpayer's income of loss from passive activities for the year. Personal interest also generally includes interest on tax deficiencies.
The majority argues that the use of the term "deficiencies" in the Conference Committee Report may be unclear and that "generally" only excludes certain types of estate taxes from "personal interest". Majority op. pp. 33- 34. The effect of these arguments is to restrain the force of the Conference Committee Report in determining the reach of what is "properly allocable" to a trade or business.
The term deficiency means "the amount by which the income, gift, or estate tax due under the law exceeds the amount of such tax shown on the return."
*162 The majority holds that the Conference Committee Report is not clear and accordingly justifies its reliance on the Joint Committee on Taxation General Explanation of the Tax Reform Act of 1986, pp. 262-264, 266, published May 4, 1987 (Blue Book). Majority op. p. 35. The majority argues that the confusion is further exacerbated because the Blue Book provides that interest on a tax deficiency relating to a sole proprietorship is considered personal interest. The majority goes too far in rejecting the Conference Committee Report in favor of the Blue Book.
In upholding the validity of
As applied to the instant case,
*163 op. pp. 47-48.]
The "legislative history" the majority relies on is the material contained in the Blue Book and in the Joint Committee on Taxation, Summary of Conference Agreement on H.R. 3838 (Tax Reform Act of 1986) (JCS-16-86), August 29, 1986 (Staff Summary). The Blue Book was published by congressional staff after the enactment of 1986 TRA. The majority argues the Staff Summary, which was produced before 1986 TRA was enacted, corroborates assertions made in the Blue Book regarding personal interest.
*103 Such reliance is unwarranted and contrary to precedent. A staff committee's explanation of a provision is not a statement by legislators and was not relied on by legislators when enacting the 1986 TRA because it was published in May 1987.
I agree with Judge Thornton's concurring opinion to the extent that he concludes that the majority's reliance on the Blue Book is misplaced. The Blue Book represents only the view of the Congressional staff; it was not approved by Congress. Furthermore, the Blue Book could not have been relied upon by Congress because it was published during the 100th Congress and the Tax Reform Act was enacted by the 99th Congress. Also, the Blue Book should not be relied on because it is inconsistent with the Conference Committee Report, which would not treat interest on a tax deficiency arising from a sole proprietorship as personal interest, whereas the Blue Book would treat such interest as personal interest. 2 Consequently, the majority's reliance*165 on the Blue Book in validating
Finally, the majority's validation of
*168 For the foregoing reasons, I respectfully dissent.
SWIFT, COLVIN, LARO, and VASQUEZ, JJ., agree with this dissenting opinion.
* * * * *
DISSENT OF JUDGE SWIFT
*105 SWIFT, J., dissenting: Mainly for the reasons set forth in my prior concurring opinion in
None of the five Courts of Appeals' opinions cited by the majority, or the instant majority opinion, persuades me to the contrary. Within the jurisdictions of the other seven geographic Courts of Appeals, taxpayers still are entitled to rely on our Court- reviewed Redlark opinion, and that is exactly what Mr. and Mrs. Robinson have done.
Two separate but related facts in this case are clear and undisputed: (1) Under the express and clear language of
Under respondent's "temporary" regulation,
Respondent's temporary regulation may provide reasonable methods for allocating interest between a taxpayer's business and a taxpayer's other activities, but if there is no question as to what an item of interest expense relates to, then the statute is clear and requires an allocation between the business and the nonbusiness*170 portions thereof, and the portion allocable to the taxpayer's business is to be allowed as a deduction. Respondent's temporary regulation, in a situation involving a sole proprietorship trade or business and a related income tax deficiency, improperly and contrary to the *106 statute, establishes a per se interest expense disallowance rule and would leave no interest expense to be allocated.
Respondent's temporary regulation is also inconsistent with
If a taxpayer incurs or assumes a debt in consideration for the sale or use*171 of property, for services, or for any other purpose, or takes property subject to a debt, and no debt proceeds are disbursed to the taxpayer, the debt is treated for purposes of this section as if the taxpayer used an amount of the debt proceeds equal to the balance of the debt outstanding at such time to make an expenditure for such property, services, or other purpose. [Emphasis added.]
The above temporary regulation provides that in the situations (and for any purpose) where financing and credit transactions do not involve the disbursement of loan proceeds but do involve the extension of credit, interest expense relating to the extension of credit is to be allocated between the taxpayer's business and personal activity based on the nature of the underlying activity giving rise to the extension of credit.
Under
Because*172 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
*107 As suggested in Judge Vasquez's dissenting opinion, in interpreting the statutory provisions in dispute herein, the occasional deference mandated by
More recently, in
The fair measure of deference to an agency administering its own statute has been understood to vary with circumstances, and
*173 courts have looked to the degree of the agency's care, its consistency, formality, and relative expertness, and to the persuasiveness of the agency's position * * *. * * * [
And further:
"The weight [accorded to an administrative] judgment in a particular case will depend upon the thoroughness evident in its consideration, the validity of its reasoning, its consistency with earlier and later pronouncements, and all those factors which give it power to persuade, if lacking power to control." [
Consistent with the above statement quoting Skidmore, and before concluding whether the particular agency rulings involved therein (of the Environmental Protection Agency and of the U.S. Customs Service, respectively) were entitled to Chevron type deference, in both Chevron and Mead the Supreme Court reviewed the very "detailed and reasoned" historical aspects of the E.P.A. ruling ( Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., supra at 865),*174 and the many "angles" of the classification ruling procedures of the U.S. Customs Service (
In the instant case, however, with regard to respondent's promulgation of
Of the Courts of Appeals that have addressed the issue before us, two inappropriately treat
Although upholding it, the Court of Appeals for the Seventh Circuit noted its concern with regard to the deference to be given
In the absence of any confirmation that the temporary regulation has, after the fact, undergone the scrutiny that typifies a pre-adoption notice and comment period, one could argue that
Whatever questions the "temporary" nature of this regulation might raise as to the degree of deference it is owed, the parties themselves have chosen not to pursue them. * * * *109 [
With regard to the relevant legislative history relating to enactment in 1986 of subsection (h) of
In the Joint Statement of Managers of the Conference Report, H. Conf. Rept. 99-841 (Vol. II) at II-154 (1986), 1986-3 C.B. (Vol. 4), 1, 154, published on September 18, 1986, the following statement is made:
Under the conference agreement, personal interest is not deductible. Personal interest is any interest, other than interest incurred or continued in connection with the conduct of a trade or business * * * Personal interest also generally includes interest on tax deficiencies. [Emphasis added.]
The emphasized language in the above quotation from the legislative history can be read to indicate that Congress in 1986 intended to carve*178 out of the definition of personal interest all interest relating to a trade or business. Once all trade or business interest is carved out of personal interest by the above emphasized language, the next sentence generally describing personal interest only reaches types of interest left over, but not business interest that already is carved out by the prior language. With this reading of the legislative history, the last sentence in the above quotation (namely, "Personal interest also generally includes interest on tax deficiencies.") may be read to reach only interest on tax deficiencies not related to a taxpayer's trade or business.
Of the approximately 15 law review and journal articles pre-and post-
*180 One commentator stated:
If a taxpayer incurs or assumes a debt in consideration for the sale or use of property, for services, or for any other purposes, or takes property subject to a debt, and no debt proceeds are disbursed to the taxpayers, the debt is treated for purposes of this section as if the taxpayer used an amount of the debt proceeds equal to the balance of the debt outstanding at such time to make an expenditure for such property, services, or other purpose.
"In the case of deficiency interest, the Government essentially extends credit to a taxpayer and assesses interest for the extension of that credit. Thus, when the underlying activity*181 which creates the deficiency relates to a taxpayer's business, the interest is 'allocable' to the business and deductible under
*111 With regard to the Blue Book to the 1986 Act, and its peculiar origin, we noted in our original opinion,
[W]e also note that the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2085, was enacted on Oct. 22, 1986, during the 99th Congress, whereas the General Explanation [the Blue Book] was published*182 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
See also
With regard to the legal context or climate which existed in 1986, at the time subsection (h) of
The problem with the dissent's reasoning [in our Redlark opinion,
As the Tax Court's decision illustrates, however, Congress does not legislate in a vacuum. Under the prior case law, the interest on an income tax deficiency resulting from an adjustment involving a trade or business was treated as interest incurred in a trade or business. If Congress is deemed to have been aware of the law at the time it enacted
Lastly, as I read it, the legislative history relating to the 1986 and the 1988 relevant legislative changes to
In sum,
(1) The unambiguous statutory language of
(2) The relevant legislative history;
(3) The case law existing at the time
*185 (4) The language of
(5) The lack of any indication that Treasury or respondent, prior to promulgation of
Respectfully, in my opinion, petitioners' business-related income tax deficiency interest should be deductible.
WELLS, COLVIN, LARO, and VASQUEZ, JJ., agree with this dissenting opinion.
* * * * *
DISSENT OF JUDGE VASQUEZ
VASQUEZ, J., dissenting: The majority has failed to convince me that we should not abide by our previous holding *113 in
In Mead, the U.S. Supreme Court clarified the limits of deference pursuant to
The Court clarified Chevron by stating that the delegation of authority may be either*188 explicit or implicit, and when Chevron deference applies, a reviewing court is obliged to accept the agency's position if Congress has not previously spoken to the point at issue and the agency's interpretation is reasonable.
Precedential value alone, however, does not add up to Chevron entitlement; interpretive rules sometimes may function as precedents, and they enjoy no Chevron status as a class.
*189 When an agency's interpretation of a particular statutory provision does not qualify for Chevron deference, it still may merit some deference pursuant to
The U.S. Court of Appeals for the Eighth Circuit was the first Court of Appeals to address the validity of the 9T regulation.
1. Tax Court
In Redlark, we noted that the 9T regulation was an interpretive, rather than a legislative, regulation.
In dissent, Judge Halpern stated that in the absence of temporary regulations a reasonable interpretation of
2. Ninth Circuit
The U.S. Court of Appeals for the Ninth Circuit, agreeing with the Eighth Circuit, reversed.
The U.S. Court of Appeals for the Fourth Circuit concluded that
The U.S. Court of Appeals for the Sixth Circuit, without analysis, simply relied on the analysis of the Court of Appeals for the Ninth Circuit in
The U.S. Court of Appeals for the Seventh*193 Circuit acknowledged that the 9T regulation is an interpretive regulation.
*194 The Court of Appeals for the Seventh Circuit acknowledged that in light of the cases predating the Tax Reform Act of 1986 (TRA 1986), Pub. L. 99-514, 100 Stat. 2085, one could argue with some force that where an income tax deficiency results from a taxpayer's trade or business the interest accrued on that deficiency should be allocable to the trade or business.
Thus, all five of the Courts of Appeals accorded the 9T regulation Chevron deference.
III. Post-Mead Case LawIn the years that have passed since the U.S. Courts of Appeals issued their opinions regarding the 9T regulation, principles of law have developed regarding the Chevron doctrine. See supra, part I. The U.S. Court of Appeals for the Fifth Circuit, the circuit to which appeal in the instant case lies, has stated: "Mead clarified that Chevron's expansive conception of judicial deference to an administrative agency's legal interpretation applies only when 'Congress delegated authority to the agency generally to make rules carrying the force of law, *195 and * * * the agency interpretation claiming deference was promulgated in the exercise of that authority.'"
In light of Mead, Chevron deference is reserved for only those agency interpretations reached through notice-and-comment or comparable formal administrative procedures.
Furthermore, in applying Mead, "mere ambiguity in a statute is not evidence of congressional delegation of authority", agency*197 authority is not to be lightly presumed, and courts should not presume a delegation of power based solely on the fact that there was not an express withholding of such power.
The fact that a court pre-Mead found the agency's position to be reasonable under the Chevron standard is insufficient; after Mead, if Chevron is inapplicable the agency's position must be persuasive.
I note that "Chevron has had a checkered career in the tax arena."
We have previously avoided, pre-Mead, the question of whether temporary regulations promulgated without notice-and- comment procedures are entitled to Chevron deference.
The first question in the Mead analysis is whether Congress delegated authority to the agency to make rules carrying the force and effect of law.
Regulations are either legislative or interpretive in character.
In
The regulations involved herein were promulgated pursuant to the general authority granted to the Secretary of the Treasury by
The majority opinion in this case agrees with this conclusion, and the Commissioner concedes that the 9T regulation is an interpretive regulation. Majority op. p. 40. As such, even if the statute were ambiguous, but see Chief Judge Wells's dissent, and assuming Congress delegated authority to the IRS to make rules carrying the force and effect of law in this area, but see Judge Swift's dissent p. 104, it appears that by choosing to issue the 9T regulation pursuant to
The majority relies on the pre-Mead opinions of the U.S. Courts of Appeals for the Fourth, Sixth, Seventh, Eighth and Ninth Circuits to support its conclusion that the 9T regulation is valid. Majority op. pp. 10-13. This is wrong, as these cases were*202 all decided pre-
In judging the validity of the 9T regulation, the majority accords an interpretive regulation "considerable weight", states that it will uphold interpretive regulations if they implement the congressional mandate in some reasonable manner, applies the pre- Mead analysis, and gives the 9T regulation Chevron deference. Majority op. pp. 40-41, 43, 51-52. In light of Mead, this analysis is improper.
Additionally, as is pointed out by Judge Thornton in his concurring opinion, the majority relies on the Joint Committee staff summary (even though the conference committee chose to adopt language less restrictive than the staff summary) and on the Blue Book (even though the Blue Book goes far beyond the language of the conference committee report to insert ideas from the staff summary that it previously suggested to the conference committee, but which the conference committee rejected and even though the Blue Book was published during the 100th Congress while TRA 1986*203 was enacted during the 99th Congress). Majority op. pp. 17-18, 35. *121 For the reasons stated in Judge Thornton's concurring opinion, our opinion in Redlark, and Judge Laro's concurring opinion in Redlark, I find this reliance unpersuasive. See also Judge Swift's dissent p. 108.
The majority acknowledges that
Deference only sets the framework for judicial analysis; it does not displace it.
WELLS, SWIFT, COLVIN, and LARO, JJ., agree with this dissenting opinion.
Footnotes
1. Cheryl R. Frank and Gerald W. Kelly, Jr., appeared on petitioners' behalf at the trial. A few months later, before filing and briefs, they moved for leave to withdraw as counsel; the Court granted their motion. Later Charles B. Sklar entered his appearance and thereafter represented petitioners on brief.↩
2. Of this total, $ 28,015 is income tax under ch. 1 and $ 1,864 is self-employment tax under ch. 2.
Unless indicated otherwise, all section and chapter references are to sections and chapters of the Internal Revenue Code of 1986 as in effect for 1995. The section references in table 1, infra↩ are to this Code as in effect for 1987.
3. Respondent disallowed petitioners' $ 69,617 deduction of "other interest" that was reported on the Schedule C (Profit or Loss From Business) attached to their 1995 tax return. The $ 69,617 interest payment was made in respect of petitioners' underpayment of their 1987 Federal individual income tax liability. The other adjustments that respondent made to petitioners' 1995 return were to petitioners' Schedule A (Itemized Deductions) and to the computation of the self-employment tax deduction and the self-employment tax liability for Edward A. Robinson III. These adjudtments are computational; their resolution depends on our determination of the issues for decision.↩
4. We do mot make further findings as to 1986 because the parties have stipulated that the $ 69,617 item which is the basic adjustment in the instant case is entirely interest on the underpayment of petitioners' 1987 tax liability.↩
1. All of the unreported income was from Edward's law practice.↩
2. Reduction in medical expense deduction, resulting from increase in adjusted gross income because of additional income from Edward's law practice.
3. Fifty percent of the interest on $ 83,632.30.↩
5. That is
sec. 163(h)(2) provides that "the term 'personal interest' means". (Emphasis added.) Compare secs. 64 and 65 ("the term * * * includes↩" (emphasis added)).6. Sec. 6243(a) of the Technical and Miscellaneous Revenue Act of 1988 (TAMRA 1988), Pub. L. 100-647, 102 Stat. 3342, 3734-3735, added sebsection (e) to
sec. 7805 .Sec. 7805(e)(2) provides that "Any temporary regulation shall expire within 3 years after the date of issuance of such regulation."Sec. 7805(e)(2) applies to any regulation issued after Nov. 20, 1988. TAMRA 1988 sec. 6232(b), 102 Stat. at 3735. The regulations herein involved were issued before Nov. 20, 1988, and thus the "sunset" provision ofsec. 7805(e)(2)↩ does not apply to these regulations.7. Although the Courts of Appeals for the Fourth and Seventh Circuits noted the application of
sec. 1.163-8T, Temporary Income Tax Reg. ,52 Fed. Reg. 24999 (July 2, 1987) (Allen v. United States, 173 F.3d 533">173 F.3d 533 , 537 (4th Cir. 1999):Kikalos v. Commissioner, 190 F.3d 791">190 F.3d 791 , 794 (7th Cir. 1999), revg.T.C. Memo 1998-92">T.C. Memo 1998-92↩ ), none of the cited Court of Appeals opinions specifically discussed the validity of this regulation.8. In
Lardas v. Commissioner, 99 T.C. 490">99 T.C. 490 , 494-495 (1992), we stated that, inGolsen v. Commissioner, 54 T.C. 742">54 T.C. 742 , 756-757 (1970), affd.445 F.2d 985">445 F.2d 985 (10th Cir. 1971), wereasoned that, where a reversal would appear inevitable, due to the clearly established position of the Court of Appeals to which an appeal would lie, our obligation as a national court does not require a futile and wasteful insistence on our view.
* * * * * * * *
It should be emphasized that the logic behind the Golsen doctrine is not that we lack the authority to render a decision inconsistent with any Court of Appeals (including the one to which an appeal would lie), but that it would be futile and wasteful to do so where we would surely be reversed. Accordingly, bearing in mind our obligation as a national court, see Lawrence v. Commissinoer, * * *
[27 T.C. 713">27 T.C. 713 , 716-717 (1957), revd. on other grounds258 F.2d 562">258 F.2d 562 (9th Cir. 1958),] we should be careful to apply the Golsen doctrine only under circumstances where the holding of the Court of Appeals is squarely on point. SeeGolsen v. Commissioner,54 T.C. at 757 .Two District Coruts in the Fifth Circuit have concluded that
section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs. ,52 Fed. Reg. 48409 (Dec. 22, 1987), is not invalid.Fitzmaurice v. United States, 2001 U.S. Dist. LEXIS 2024">2001 U.S. Dist. LEXIS 2024 , 87 A.F.T.R.2d (RIA) 654,2001-1 U.S. Tax Cas. (CCH) P50,198 (S.D. Tex. 2001) ;Davis v. United States, 71 F. Supp. 2d 622↩ (W.D. Tex. 1999) . Although these opinions are relevant to the instant case, they do not control because they are not Court of Appeals opinions.9.
Sec. 6621(c)↩ later was repealed by sec. 7721(b) of the Omnibus Budget Reconciliation Act of 1989, Pub. L. 101-239, 103 Stat. 2106, 2399.3.
Sec. 163(h)(2)(A) was amended by sec. 1005(c)(4) of the Technical and Miscellaneous Revenue Act of 1988, Pub. L. 100-647, 102 Stat. 3342, 3390.Sec. 163(h)(2)(A) , as originally enacted in 1986, provided:(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.↩
10. This is the general rule not only because of the authority of the cited opinions, but also becauase this is the way legislative drafters are instructed to draft statutes. See, e.g., Office of the Legislative Counsel U.S. House of Representatives, House Legislative Counsel's Manual on Drafting Style, 3 (1995), as follows:
(4) Use same word over and over.--If you have found the right word, don't be afraid to use it again and again. In other words, don't show your pedantry by an ostentatious parade of synonyms, Your English teacher may be disappointed, but the courts and others who are straining to find your meaning will bless yoou.
(5) Avoid utraquistic subterfuges.--Do not use the same words in 2 different ways in the same draft (unless you give the reader clear warning).
To the same effect, see Dickerson, The Interpretation and Application of STatutes 224 (1975), quoted in
Zuanich v. Commissioner, 77 T.C. 428">77 T.C. 428 , 443 n.26 (1981), as follows:26 See R. Dickerson, The Interpretation and Application of Statutes 224 (1975), as follows:
Because legal documents are for the most part nonemotive, it is presumed that the author's language has been used, not for its artistic or emotional effect, but for its ability to convey ideas. Accorfingly, it is presumed that the author has not varied his teminology unless he has changed his meaning, and has not changed his meaning unless he has varied his terminology; that is, that he has committed neither "elegant variation" nor "utraquistic subterfuge". This is the rebuttable presumption of formal consistency. [Fn. refs. omitted.]
See also Hirsch, Drafting Federal Law, sec. 5.2 (3d ed. 1992).↩
11. This presumption is rebuttable. In the TAMRA 1988 amendments, at every step in the enactment of the change from "incurred or continued in connection with the conduct of" to "properly allocable to" the Congress stated in intention that this was done to effectuate more clearly the original intention of TRA 1986 and not to change the meaning of the statute. See infra, Appendix. Consistent with these statements of congressional intent, the TAMRA 1988 amendments took "effect as if included in the provision of" the TRA 1986 to which the TAMRA 1988 amendments relate. See also
Redlark v. Commissioner, 106 T.C. at 34↩ n.3 . However, the parties have not directed our attention to, and we have not found, any evidence that either the enacted TRA 1986 language or the enacted TAMRA 1988 language was intended to have the same meaning as the language interpreted in the pre-TRA 1986 opinions.7. In this connection, we also note that the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2085, was enacted on Oct. 22, 1986, during the 99th Congress, whereas the General Explanation was published on May 4, 1987, during the 100th Congress. Thus, the General Explanation is not even entitled to the respect it might otherwise be accorded if it had been prepared for the Congress which enacted
sec. 163(h)↩ .8. See also
Lawson v. Commissioner, T.C. Memo 1994-286">T.C. Memo 1994-286↩ .12. See e.g.,
Lundy v. Commissioner, T.C. Memo 1993-278">T.C. Memo 1993-278 , revd.45 F.3d 856">45 F.3d 856 (4th Cir. 1995), revd.516 U.S. 235">516 U.S. 235 , 133 L. Ed. 2d 611">133 L. Ed. 2d 611, 116 S. Ct. 647">116 S. Ct. 647↩ (1996), in which the parties agreed that the taxpayer had a $ 778 deficiency even though the taxpayer's withheld (and not refunded) income taxes exceeded his total tax liability.13. E.g., when a correct tax return is filed, but the payments are less than the correctly stated liabilities. ↩
14. The reference to sec. 6166 later was stricken by sec. 503(b)(2)(B) of the Taxpayer Relief Act of 1997, Pub. L. 105-34, 111 Stat. 788.↩
15. Beginning with the Tax Reform Act of 1969, Pub. L. 91-172, 83 Stat. 487, the Congress began to bring a series of regulatory excise taxes into the definition of "deficiency" in sec. 6211. At the time TRA 1986 was enacted, the definition included the taxes imposed by chs. 41 through 45, in addition to the income, estate, and gift taxes imposed by subtits. A and B. ↩
16.
Sec. 1.163-8T(c)(1) and(c)(3)(ii) ,Temporary Income Tax Regs., supra , provides in pertinent part as follows:Sec. 1.163-8T Allocation of interest expense among expenditures (temporaty).(a) In General--(1) Application. This section prescribes rules for allocating interest expenses for purposes of applying
sections 469 (the "passive loss limitations") and 163(d) and (h) (the "nonbusiness interest limitations").* * * * * * * *
(c) Allocation of debt and interest expense--(1) Allocation in accordance with use of proceeds. Debt is allocated to expenditures in accordance with the use of the debt proceeds and, * * *, * * * debt proceeds and related interest expense are allocated solely by reference to the use of such proceeds, and the allocation is not affected by the use of an interest in any property to secure the repayment of such debt or interest. * * *
* * * * * * * *
(3) Allocation of debt; proceeds not disbursed to borrower--* * *
* * * * * * * *
(ii) Debt assumptions not involving case 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.
17.
Sec. 1.163-9T(b)(2)(i)(A) ,Temporaty Income Tax Regs., supra , provides as follows:Sec. 1-163-9T Personal interest (temporary).
* * * * * * *
(b) Personal interest--
* * * * * * * *
(2) Interest relating to taxes--(i) In general. Except as provided in paragraph (b)(2)(iii) of this section, personal interest includes interest--
(A) Paid on underpayments of individual Federal, State or local income taxes and on indebtedness used to pay such taxes (within the meaning of
sec. 1.168-8T ), regardless of the source of the incomegenerating the tax liability.* * * * * * *
(ii) Example.
A, an individual, owns stock of an S corporation. On its return for 1987, the corporation underreports its taxable income. Consequently, A underreports A's share of that income on A's tax return. In 1989, A pays the resulting deficiency plus interest to the Internal Revenue Service. The interest paid by A iin 1989 on the tax deficiency is personal interest, notwithstanding the fact that the additional tax liability may have arisen out of income from a trade or business. The result would be the same if A's business had been operated as a sole proprietorship.
Given the interaction between
secs. 1.163-8T and1.163-9 T, Temporary Income Tax Regs., supra , and the fact that there is nosec. 1.168-8T, Temporary Income Tax Regs. , it appears that the reference to sec. 1.168-8T, Temporary Income Tax Regs., supra , insec. 1.163-9T(b)(2)(i)(A) , supra, should be to sec. 1.163-8T, Temporary Income Tax Regs., supra , instead. Seesec. 1.163-9T(b)(3) ,Temporary Income Tax Regs., supra (cross-referencing sec. 1.163-8T, Temporarty Income Tax Regs., supra↩ , for rules determining the allocation of interest expense to various activities).18.
Treasury Decision 8145 refers tosec. 469(k)(4) .T.D. 8145, 2 C.B. 47">1987-2 C.B. 47 , 50. That provision was redesignated assec. 469(l)(4) . See Appendix note 1. For convenience, we refer to this provisiono assec. 469(l)(4)↩ .4. For example, an interest deduction that is disallowed under section 265 or 291 should not be allowed, capitalized, or suspended under another provision.↩
60. Personal interest does not include interest on taxes, other than income taxes, that are incurred in connection with a trade or business. (For the rule that taxes on net income are not attributable to a trade or business, see
Treas. Reg. sec. 1.62-1(d)↩ , relating to nondeductibility of State income taxes in computing adjusted gross income.) * * * [1986 Blue Book at 266.]1. This pamphlet may be cited as follows: Joint Committee on Taxation, Summary of Conference Agreement on H.R. 3838 (Tax Reform Act of 1986)(JCS-16-86), August 29, 1986.↩
1. The Technical and Miscellaneous Revenue Act of 1988, Pub. L. 100-647, sec. 1005(c)(4), 102 Stat. 3342, 3390, H. Rept. 100-795, at 33-37 (1988).↩
4. For example, an interest deduction that is disallowed under section 265 [relating to expenses and interest relating to tax- exempt income] or 291 [relating to special rules relating to corporate preference items] should not be allowed, capitalized, or suspended under another provision. [H. Conf. Rept. 99-841, at II-146, supra, 1986-3 C.B. (Vol. 4), at 146.]↩
55. For legislative background of the provision, see: H. R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 402; H. Rep. 99-426, pp. 296-301; H.R. 3838 as reported by the Senate Committee on Finance on May 29, 1986, sec. 1421; S. Rep. 99-313, pp. 802-808; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 151-157 (Conference Report).↩
60. Personal interest does not include interest on taxes, other than income taxes, that are incurred in connection with a trade or business. (For the rule that taxes on net income are not attributable to a trade or business, see
Treas. Reg. sec. 1.62-1(d)↩ , relating to nondeductibility of State income taxes in computing adjusted gross income.) In addition, personal interest does not include interest of an S corporation which is attributable to an underpayment of income tax from a year in which the corporation was a C corporation or from the underpayment of the taxes imposed by sec. 1374 or 1375. Nor does personal interest include interest on an underpayment of income tax of a corporation payable by a shareholder by reason of transferee liability (under sec. 6901).3. See Judge Swift's dissent pp. 103-104 and see generally Judge Vasquez↩'s dissent.
2. The Blue Book provides: "Personal interest also includes interest on underpayments of individual Federal, State, or local income taxes notwithstanding that all or a portion of the income may have arisen in a trade or business, because such taxes are not considered derived from the conduct of a trade or business." Staff of Joint Comm. On Taxation, General Explanation of the Tax Reform Act of 1986, at 266. (J. Comm. Print 1987).↩
3. See Judge Swift's dissent pp. 103-104 and see generally Judge Vasquez↩'s dissent.
1. The Technical and Miscellaneous Revenue Act of 1988, Pub. L. 100-647, sec. 1005(c)(4), 102 Stat. 3342, 3390, H. Rept. 100-795, at 33-37 (1988).↩
2. The Blue Book provides: "Personal interest also includes interest on underpayments of individual Federal, State, or local income taxes notwithstanding that all or a portion of the income may have arisen in a trade or business, because such taxes are not considered derived from the conduct of a trade or business." Staff of Joint Comm. On Taxation, General Explanation of the Tax Reform Act of 1986, at 266. (J. Comm. Print 1987).↩
3. See Judge Swift's dissent pp. 103-104 and see generally Judge Vasquez↩'s dissent.
4. Statistics of Income Bulletin, Vol. 20, no. 1, from table 10.-Nonfarm sole proprietorship returns: selected income statement items for specified income years, 1980-1998, Summer 2000.↩
5. Statistics of Income Bulletin, Vol. 21, no. 1, from table 1.-Nonfarm sole proprietorships: business receipts, payroll, and net income, by industrial sectors classified with the North American Industries Classification System, Summer 2001.↩
1. See
Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837">467 U.S. 837 , 81 L. Ed. 2d 694">81 L. Ed. 2d 694, 104 S. Ct. 2778">104 S. Ct. 2778, part VI at 853-859 (1984);United States v. Mead Corp., 533 U.S. 218">533 U.S. 218 , 150 L. Ed. 2d 292">150 L. Ed. 2d 292, 121 S. Ct. 2164">121 S. Ct. 2164↩, part B at 231-234 (2001).2. Eller, "Interest Deduction for Noncorporate Tax Deficiencies", 56 Taxn. for Acct. 209, 211 (1996); Lipton, "Redlark Reversed but Interest Deductions for Business Tax Deficiencies is Still an Open Issue",
89 J. Taxn. 24, 28 (1998) ; Lipton, "Divided Tax Court Allows Deduction of Interest on Tax Arising From a Trade or Business",84 J. Taxn. 218, 222 (1996) ; Newmark & Englebrecht, "Courts Split on Individuals' Deficiency Interest Deduction",62 Prac. Tax Strat. 87, 95 (1999) ; Raby & Raby, "Allocating Individual Tax Deficiency Interest",70 Tax Notes 573">70 Tax Notes 573 , 575 (1996); Andreozzi, Comment, "Prohibiting the Deduction for Noncorporate Tax Deficiency Interest: When Treasury Goes Too Far",34 J. Marshall L. Rev. 557">34 J. Marshall L. Rev. 557 , 579-581 (2001); Reynolds, Comment, "Redlark v. Commissioner: A 'Bird in the Hand' for Noncorporate Taxpayers?",47 Case W. Res. L. Rev. 751">47 Case W. Res. L. Rev. 751 , 795↩ (1997).3. Engel, "Deducting Interest on Federal Income Tax Underpayments: A Roadmap Through a 50-Year Quagmire",
16 Va. Tax Rev. 237">16 Va. Tax Rev. 237 , 296-297↩ (1996).4. Harllee, 536-2nd Tax Mgmt. (BNA), "Interest Expense Deductions", at A-113 (1998); Popkin, "The Taxpayers' Third Personality: Comments on Redlark v. Commissioner",
72 Ind. L.J. 41">72 Ind. L.J. 41 , 61↩ (1996).5. 7 Mertens, Law of Federal Income Taxation, sec. 26: 35, at 93 (2001); Banoff et al., "After Allen, Is There Substantial Authority for Deducting Interest on Tax Deficiencies?",
90 J. Taxn. 377 (1999) ; Banoff et al., "Two More Courts Reject Redlark -- Interest on Taxes Not Deductible",91 J. Taxn. 255 (1999) ; Raby, "Deducting Interest on a Form 1040 Deficiency",67 Tax Notes 945">67 Tax Notes 945 , 946 (1995); "Interest on Taxes Never Deductible, Ninth CircuitSays -Redlark Reversed",88 J. Taxn. 260↩ (1998) .6. Since Nov. 20, 1988, temporary regulations promulgated thereafter automatically sunset after 3 years.
Sec. 7805(e)↩ .7. See
Reise v. Commissioner, 35 T.C. 571">35 T.C. 571 (1961), affd.299 F.2d 380">299 F.2d 380 (7th Cir. 1962);Polk v. Commissioner, 31 T.C. 412">31 T.C. 412 (1958), affd.276 F.2d 601">276 F.2d 601 (10th Cir. 1960);Standing v. Commissioner, 28 T.C. 789">28 T.C. 789 (1957), affd.259 F.2d 450">259 F.2d 450↩ (4th Cir. 1958).8. Note that
sec. 1.163-8T(c)(3)(ii), Temporary Income Tax Regs. , was promulgated on July 2, 1987,52 Fed. Reg. 25001 (July 2, 1987), prior to promulgation on Dec. 22, 1987 ofsec. 1.163- 9T(b)(2)(i)(A) , Temporary Income Tax Regs.,52 Fed. Reg. 48409↩ (Dec. 22, 1987).1. The Court cites numerous cases where notice-and- comment rulemaking took place, but only one where it did not, and Chevron deference was accorded.
United States v. Mead Corp., 533 U.S. 218">533 U.S. 218 , 230 n. 12, 231 n. 13, 150 L. Ed. 2d 292">150 L. Ed. 2d 292, 121 S. Ct. 2164">121 S. Ct. 2164↩ (2001).2. It is unclear why the court chose to focus on "business interest" rather than "personal interest".↩
3. This suggests that every time a statute fails to define a word or term, or any time judges disagree regarding the meaning of a word or phrase in a statute, the statute is automatically ambiguous.↩
4. Proposed regulations are generally not afforded any more weight than that of the position advanced by the Commissioner on brief.
Gen. Dynamics Corp. v. Commissioner, 108 T.C. 107">108 T.C. 107 , 120 (1997);Laglia v. Commissioner, 88 T.C. 894">88 T.C. 894 , 897↩ (1987).5. "Only when agencies act through 'adjudication[,] notice-and-comment rulemaking, or * * * some other [procedure] indicat[ing] comparable congressional intent [whatever that means]' is Chevron deference applicable * * * ."
United States v. Mead Corp., supra at 240↩ (Scalia, J., dissenting).6. It also appears that the 9T regulation is not entitled to Chevron deference for another reason: The 9T regulation did not go through notice-and-comment, there is no evidence that it went through comparable formal administrative procedures, and it remains in temporary form 15 years later.
Ind. Family & Soc. Servs. Admin. v. Thompson, 286 F.3d 476">286 F.3d 476 , 480 (7th Cir. 2002);TeamBank, N.A. v. McClure, 279 F.3d 614">279 F.3d 614 , 619 (8th Cir. 2002);U.S. Freightways Corp. v. Commissioner, 270 F.3d 1137">270 F.3d 1137 , 1141 (7th Cir. 2001), revg.113 T.C. 329">113 T.C. 329 (1999);Kikalos v. Commissioner, 190 F.3d 791">190 F.3d 791 , 796 (7th Cir. 1999), revg.T.C. Memo 1998-92">T.C. Memo 1998-92↩ .