1The three houses not removed to make way for expansion of the campus were found in other

parts of Texas and were moved, variously, 20, 70, and 80 miles to Heritage Square. 

United States Court of Appeals,

Fifth Circuit.

No. 92-4954.

George S. NALLE, III, and Carole Nalle, Petitioners-Appellants,

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

Charles A. BETTS and Sylvia I. Betts, Petitioners-Appellants,

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

Aug. 16, 1993.

Appeal from a Decision of the United States Tax Court.

Before SMITH, DUHÉ, and WIENER, Circuit Judges.

JERRY E. SMITH, Circuit Judge:

George and Carole Nalle and Charles and Sylvia Betts (collectively, the "taxpayers") appeal

a decision of the Tax Court upholding the assessment of an income tax deficiency against them by

the Commissioner of Internal Revenue (the "Commissioner"). Because we find the treasury

regulation pursuant to which the Commissioner assessed the deficiency to be an invalid interpretation

of the statute, we reverse.

I.

George Nalle ("Nalle") owns a fifty-percent interest in the Heritage Square Joint Venture,

which, between 1982 and 1984, identified eight buildingsin and around Austin that were appropriate

for rehabilitation and relocation, five of which were slated for demolition in order to accommodate

the expanding campus of the University of Texas at Austin. All eight houses were purchased and

moved to the Heritage Square office subdivision in suburbanRollingwood, where theywere restored

to substantially the same style and condition as originally constructed.1
Because each house was more than forty years old on the date rehabilitative work

commenced, Nalle claimed an investment tax credit for over $500,000 ofthe rehabilitation performed

in tax years 1983-86, pursuant to section 48(g) ofthe InternalRevenueCode (the "Code"), 26 U.S.C.

§ 48(g). Heritage did not claim the tax credit for expenditures incurred in refurbishing one of its

properties, the Julia Harris house, but passed the credit on to the purchasers, appellants Charles and

Sylvia Betts, who reported a credit for $35,934 on their joint 1983 federal tax return, $14,322 of

which was carried back to their 1980 return.

On June 28, 1985, the Internal Revenue Service ("IRS") published proposed treasury

regulation 26 C.F.R. § 1.48-12, subsection (b)(5) of which set forth a requirement that "qualified

rehabilitated buildings" such as were eligible for the section 48(g) tax credit not have been relocated

within forty years of the date on which rehabilitation was begun. The regulation was adopted in final

form on October 7, 1988, and was applied retroactively to rehabilitation expenditures incurred after

December 31, 1981. The IRS audited the taxpayers' returns for 1983-86, and on June 9, 1989, issued

a statutory notice of deficiency disallowing the credits.

In the Tax Court, it was stipulated that the houses qualified for the rehabilitation tax credit

but for the exclusion of relocated properties contained in section 1.48-12(b)(5). The taxpayers

argued that the new regulation was invalid because it added a requirement to the statute that had not

previously existed, yet was passed pursuant to the Commissioner's interpretive authority under 26

U.S.C. § 7805(a) and not pursuant to any legislative authority conferred by Congress with respect

to section 48(g). The Commissioner countered that the regulation was not inconsistent with the

statutory text and vindicated a central policy goal of the original legislation (as revealed by the

legislative history)—the revitalization of decayed and deteriorating areas. The Tax Court ruled in

favor of the Commissioner, citing the support for his position contained in the legislative history of

the tax credit.

II.

An interpretive regulation promulgated pursuant to the Commissioner's authority under

section 7805(a) is generally "entitled to substantial weight." Lykes v. United States, 343 U.S. 118,
 

2Section 7805(a) provides, in pertinent part, that "the Secretary [of the Treasury] shall

prescribe all needful rules and regulations for the enforcement of this title, including all rules and

regulations as may be necessary by reason of any alteration of law in relation to internal revenue." 

26 U.S.C. § 7805(a) (Supp.1993). Although the section expressly refers to the Treasury

Secretary, the Commissioner is an authorized delegate of the Secretary. See 26 C.F.R. §

601.601(a)(1). 

 

3Section 48 was redesignated as section 47 by the Omnibus Budget Reconciliation Act of

1990, Pub.L. 101-508, § 11813, 104 Stat. 1388—536 et seq. 

127, 72 S.Ct. 585, 590, 96 L.Ed. 791 (1952).2 The Supreme Court has provided us with substantial

guidance in reviewing the propriety of such regulations:

In determining whether a particular regulat ion carries out the congressional mandate in a

proper manner, we look to see whether the regulation harmonizes with the plain language of

the statute, its origin, and its purpose. A regulation may have particular force if it is a

substantially contemporaneous construction of the statute by those presumed to have been

aware of congressionalintent. If the regulation dates from a later period, the manner in which

it evolved merits inquiry. Other relevant considerations are the length of time the regulation

has been in effect, the reliance placed on it, the consistency of the Commissioner's

interpretation, and the degree of scrutiny Congress has devoted to the regulation during

subsequent re-enactments of the statute.

National Muffler Dealers' Ass'n v. United States, 440 U.S. 472, 477, 99 S.Ct. 1304, 1307, 59

L.Ed.2d 519 (1979).

III.

The dispute here isthe interpretation of one subsection of the Code provided by a regulation

issued more than five years after the subsection it purportsto interpret. The key subsection is section

48(g)(1)(A), which, as it existed for the tax years in question,3set out a three-part test governing

eligibility for the rehabilitative investment tax credit:

(A) In general.—The term "qualified rehabilitated building" means any building (and

its structural components)—

(i) which has been rehabilitated,

(ii) which was placed in service before the beginning of the rehabilitation, and

(iii) 75 percent or more of the existing external walls of which are retained in

place as external walls in the rehabilitation process.

Only the last of these requirements, referred to by the parties as the "external wall test,"

concerns us. It is the taxpayers' contention that the external wall test means more or less what it

says—that a building may qualify for the tax credit only if itsstructure remainssubstantially the same
 

4Section 1.48-12(b)(5) states, in part, as follows:

Location at which the rehabilitation occurs. A building, other than a

certified historic structure ... is not a qualified rehabilitation building unless it has

been located where it is rehabilitated for the thirty-year period immediately

preceding the date physical work on the rehabilitation began in the case of a "30-

year building" or the forty-year period immediately preceding the date physical

work on the rehabilitation began in the case of a "40-year building."

26 C.F.R. § 1.48-12(b)(5) (1992). 

as before rehabilitation. The test, they say, simply serves to distinguish new construction, for which

no credit is allowed, fromrehabilitation, for which the credit is available. The Commissioner, relying

largely upon a deferentialreview of agency determinations, arguesthat section 1.48-12(b)(5), which

divines in the external wall test a restriction on relocation of non-historic rehabilitated buildings, is

not inconsistent with the origin and purpose of the statute.4

As previously noted, the Tax Court upheld the regulation on the basis that it "harmonized"

with congressionalintent, at least asrevealed byselected passagesfromthe credit'slegislative history:

The legislative history ofsection 48 revealsthat it is not, as petitioners contend,solely

a device to promote the rehabilitation of older buildings. From its inception, the tax credit

for rehabilitation expenditures wasintended to provide an economic stimulus for those areas

susceptible to economic decline and abandonment, particularly the "central cities and

neighborhoods of all communities."

Nalle v. Commissioner, 99 T.C. 187, 195, 1992 WL 184967 (quoting H.R.REP. No. 1445, 95th

Cong., 2d Sess. 86, reprinted in 1978 U.S.C.C.A.N. 7046, 7121).

We are mindful, at the outset, of Justice Scalia's recent reference to the use of legislative

history as oftentimes being "the equivalent of entering a crowded cocktail party and looking over the

heads of the guests for one's friends." Conroy v. Aniskoff, --- U.S. ----, ----, 113 S.Ct. 1562, 1567,

123 L.Ed.2d 229 (1993) (Scalia, J., concurring). Our reading of the scant legislative history

surrounding the 1978 adoption and 1981 amendment ofsection 48(g) suggests that, in this case, the

Tax Court picked its few friends from an otherwise indifferent crowd.

Foremost among those friendsisthe above-quoted House report on theRevenue Act of 1978,

whichfirst extended the investment taxcredit—previouslyrestricted to equipment andmachinery—to

non-historical, non-residential buildings. According to the report, among the reasons for the change
was as follows:

Presently, there is a similar concern [to that which gave rise to the investment tax

creditformachineryand equipment] about the declining usefulness of existing, older buildings

throughout the country, primarily in central cities and older neighborhoods of all

communities....

The committee believesthat it is appropriate now to extend the initial policy objective

of the investment credit to enable business to rehabilitate and modernize existing structures.

This change in the investment credit should promote greater stability in the economic vitality

of areas that have been developing into decaying areas.

1978 U.S.C.C.A.N. at 7121.

In 1981, Congressimposed a three-tiered structure upon the tax credit: Rehabilitated historic

structures would receive a 257 credit, structures at least forty years old a 207 credit, and

thirty-year-old structures, 157. The Tax Court also cited the legislative history of this amendment

to validate the Commissioner's regulation. The Senate Report states as follows:

The tax incentives for capital formation provided in other sections of this bill might

have the unintended and undesirable effect of reducing the relative attractiveness of the

existing incentives to rehabilitate and modernize older business structures. Investments in

new structures and new locations, however, do not necessarily promote economic recovery

if they are at the expense of older structures, neighborhoods, and regions. A new structure

with new equipment may add little to capital formation or productivity if it simply replaces

an existing plant in an older structure in which the new equipment could have been installed.

Furthermore, the relocation of business can result in substantial hardship for individuals and

communities. Since this hardship does not affect the profitability of the business, it may not

have been fully taken into account in the decision to relocate, even though it is an economic

detriment to the society as a whole.

The increased credit for rehabilitation expenditures is intended to help revitalize the

economic prospects of older locations and prevent the decayand deterioration characteristics

of distressed economic areas.

S.REP. No. 144, 97th Cong., 1st Sess. 72, reprinted in 1981 U.S.C.C.A.N. 105, 177.

As the above excerpts attest, the Tax Court's conclusion that the 1988 regulation vindicated

the statute's intent to revitalize depressed areas, stated most forcefully in the legislative history

appended to the 1981 amendments, is not entirely without foundation; Congress undoubtedly

considered the bill's revitalizing potential as among its more attractive features. Thus, the

Commissioner contends that the prohibition on relocation contained in section 1.48-12(b)(5) naturally

arises from Congress's broadly expressed intent (in the legislative history) to benefit depressed

communities. Absent such a prohibition, the Commissioner maintains, nothing prevents a taxpayer
from doing ostensibly what the taxpayers have done here: relocating old buildings from one

neighborhood to another without conferring any visible benefit upon the "distressed economic areas"

whose plight Congress sought to ameliorate.

This fact, however, urged so strenuously by the Commissioner as determinative of the issue

before us, cannotsupport the stress he places upon it. Contrary to the Commissioner's interpretation,

the legislative history never speaks in exclusive terms of the goal of urban revitalization, nor can it

be said that Congressstructured the statute to vindicate such a goal exclusive of other concerns. Had

it intended to do so, a restriction upon the credit's availability solely to "certified" depressed areas

would seem in order, just as the credit for historic rehabilitation was limited to certified historic

structures. Even with the regulatory prohibition on relocation in place, the statute presents a

singularly imprecise means for revitalizing depressed areas: Any old building, even one located in a

wealthy area, may still qualify, so long as it is not moved—even to a depressed area.

A better reading of the legislative history is that Congress merely anticipated that urban

revitalization would be a collateral benefit of the legislation. The 1978 history speaks primarily of

a desire to redress the then-skewed incentives leading businesses to invest in new equipment and

machines and new buildings to house them. While the old buildings targeted by the credit are

"primarily in central cities and older neighborhoods" (emphasis added), nothing in either the statute

or the history suggests that they are exclusively so or that the credit should be limited to those that

are. Rather, the explanation of the provision expresses the expectation that, as an added bonus,

"[t]his change ... should promote greater stability in the economic vitality of areas that have been

developing into decaying areas." 1981 U.S.C.C.A.N. at 7121.

The legislative history to the 1981 amendment states the revitalization goals of the statute in

far stronger terms than does the 1978 history, but it too must be understood in its proper context.

The 1981 amendment merelyincreased (and differentiated depending on age and historicalvalue)the

credit, in order to enhance the relative attractiveness to businesses of rehabilitating old structures

vis-à-visrelocating to newer ones. Thus, the language stressing the negative impact of relocation on

depressed communities meant relocation from old to new buildings, not from poor to wealthy areas;
just as with the 1978 history, the Congress was acting on the expressed assumption that most of the

old buildings subject to the credit were in depressed areas, and, therefore, that the increased credit

would benefit those neighborhoods primarily.

The inconclusiveness of the legislative history, however, is by no means dispositive. If it

were, we might be inclined to side with the Commissioner, in light of the deference courts generally

owe to interpretations of a statute by an agency charged with its enforcement. See Chevron U.S.A.,

Inc. v. Natural Resources Defense Council, 467 U.S. 837, 844-45, 104 S.Ct. 2778, 2783, 81 L.Ed.2d

694 (1984). Here, however, we deal not with the sort of "legislative regulation" at issue in Chevron,

see id. at 843-44, 104 S.Ct. at 2782, but with an interpretive regulation promulgated under the

Commissioner's authority pursuant to section 7805(a). Accordingly, "we owe the interpretation less

deference than a regulation issued under a specific grant of authority to define a statutory term or

prescribe a method of executing a statutory provision." Rowan Cos. v. United States, 452 U.S. 247,

253, 101 S.Ct. 2288, 2292, 68 L.Ed.2d 814 (1981); United States v. Vogel Fertilizer Co., 455 U.S.

16, 24, 102 S.Ct. 821, 827, 70 L.Ed.2d 792 (1982).

More significant for purposes of judicial analysis, however, is the lack of ambiguity in the

statute. In section 48(g), Congress crafted a detailed and reasonably precise means for determining

eligibility for the tax credit; the three-part "external wall test" and the statutory definitions of all key

phrases evidence that Congress left relatively little for the Commissioner to interpret. Like the

regulation invalidated in Vogel Fertilizer, section 1.48-12(b)(5) "purports to do no more than add

a clarifying gloss on a term ... that has already been defined with considerable specificity by

Congress." 455 U.S. at 24, 102 S.Ct. at 827.

In the absence of any ambiguity, our analysis must be confined to the plain language of the

statute. As the Supreme Court has stated,

Legislative history can be a legitimate guide to a statutory purpose obscured by ambiguity,

but in the absence of a clearly expressed legislative intention to the contrary, the language of

the statute itselfmust ordinarily be regarded as conclusive. Unless exceptional circumstances

dictate otherwise, when we find the terms of a statute unambiguous, judicial inquiry is

complete.

Burlington N. R.R. v. Oklahoma Tax Comm'n, 481 U.S. 454, 461, 107 S.Ct. 1855, 1860, 95 L.Ed.2d
 

5

Initially proposed and published in 1980, see 45 Fed.Reg. 71368, 71369 (1980), § 1.48-

11(b)(4)(iv) was issued in its final form in 1985, see 50 Fed.Reg. 26696, 26699 (1985), and reads

as follows:

Retained in place. An existing external wall is retained in place if the

supporting elements of the wall are retained in place. An existing external wall is

not retained in place if the supporting elements of the wall are replaced by new

supporting elements. An external wall is retained in place, however, if the

supporting elements are reinforced in the rehabilitation, provided that such

supporting elements of the external wall are retained in place. An external wall is

retained in place even though it is covered (e.g., with new siding). Moreover, the

existing curtain may be replaced with a new curtain provided that the structural

framework that provides for the support of the existing curtain is retained in place. 

An external wall is retained in place notwithstanding that the existing doors and

windows in the wall are modified, eliminated, or replaced. A wall may be

disassembled and reassembled so long as the same supporting elements are used

when the wall is reassembled. Thus, for example, in the case of the brick wall, the

wall is considered retained in place even though the original bricks are removed

(for cleaning, etc.) and put back to form the wall.

26 C.F.R. § 1.48-11(b)(4)(iv) (1992). 

404 (1987) (citations and internal quotation marks omitted). Before the Tax Court, the

Commissioner anchored section 1.48-12(b)(5)'sinterpretationofthe statute in the "externalwalltest"

ofsection48(g)(1)(A)(iii). According to the Commissioner, that subsection's dictum that seventy-five

percent of the pre-existing external walls must be "retained in place" in order to qualify for the credit

necessarily implies a limitation on relocation: " "Retained' and "retained in place' must have different

meanings.... [E]ither the words "in place' provide a restriction on location, or they are superfluous."

Nalle, 99 T.C. at 190 (alteration in original).

We discern, however, a number of difficulties with the Commissioner's "plain language"

interpretation of section 48(g). While, generally, it is a tenet of statutory construction that every

word must be given meaning where possible, such that no word or phrase is rendered superfluous by

interpretation, the original regulations for the tax credit defined "retained in place" and said nothing

respecting a restriction on the relocation of rehabilitated structures.5 The considerable detail of the

regulation suggests that, had Congress intended to incorporate some such restriction within the

phrase "retained in place," here was an opportunity for the Commissioner to mention it. His failure

to do so until after the taxpayers had acted in reliance upon the 1980 proposed regulations weighs

heavily in our analysis, inasmuch as National Muffler directs us to consider not only such reliance
 

6We note that the statute was amended in 1986 to divorce the treatment of certified historic

structures from that of non-historic qualified rehabilitated buildings by limiting the application of

the external wall test solely to the latter structures. See Tax Reform Act of 1986, Pub.L. No. 99-

514, § 251(b), 100 Stat. 2085, 2184 (1986). The amendment renders the Commissioner's

interpretation of the phrase "retained in place" at least plausible, if only as applied prospectively

from the date of passage. But here the Commissioner has sought to extend § 1.48-12(b)(5)

retroactively to rehabilitation expenditures incurred after December 31, 1981. That the statute

had to be amended to conform to the regulation, rather than the reverse, strongly implies the

regulation's invalidity as an interpretation of the statute prior to the amendment.

Moreover, Treasury regulation 26 C.F.R. § 1.191-2(e)(6) formerly expressly

provided that the expenses incurred in relocating a certified historic structure could be

included in the rehabilitation expenses subject to amortization under Code § 191. 

Although § 191 was repealed in the Economic Recovery Tax Act of 1981, Pub.L. 97-34,

§ 212(d)(1), 95 Stat. 172, 239, it is further evidence of the implausibility of § 1.48-

12(b)(5)'s interpretation of the statute. 

 

7Lastly, we point out that while the Commissioner disputes the taxpayers' contention that §

1.48-12(b)(5) creates an additional requirement to those contained in the statute, the taxpayers

simply are quoting the Commissioner's own words back to him. The notice of proposed

rulemaking that introduced § 1.48-12(b)(5) in 1985 stated that "[t]he proposed regulations

upon a regulation, but also the consistency of the Commissioner's interpretation of the statute when

scrutinizing regulations for their fidelity to the Congressional mandate. See National Muffler, 440

U.S. at 477, 99 S.Ct. at 1307.

More damning of the Commissioner's claim that section 1.48-12(b)(5) merely clarifies the

statute's application is its logical incoherence. As written, the regulation expressly exempts certified

historic structures; they may still be relocated and qualify for the credit. But the Commissioner does

not explain how the statutory phrase "retained in place," when applied to old buildings, means that

they may not be relocated from their originalsite, but implies no such limitation when applied to old,

historic buildings.6

Similar attempts at such investment tax credit alchemy by the Commissioner have been

rejected recently by two courts intimately familiar with tax appeals. See Griffin Indus. v. United

States, 92-2 U.S.T.C. (CCH) ¶ 50,606 at 86129 (Cl.Ct.1992)(invalidating 26C.F.R. § 1.48-9(g)(1));

Pepcol Mfg. Co. v. Commissioner, 98 T.C. 127, 134, 1992 WL 17457 (1992) (en banc) (same). The

Commissioner cannot explain away this ultimate incompatibility of his regulation with the statute by

reference to the legislative history; where a plain reading of the statute precludes the Commissioner's

interpretation, no legislative history—be it ever so favorable—can redeem it.7
contain additional restrictions applying in the case of buildings that have been moved." See L.R.

238-81, 1985-2 C.B. 777, 778 (emphasis added). 

We find, therefore, that the interpret ation urged by the Commissioner, and embodied in

section 1.48-12(b)(5) finds no support in the statutory text. While this resolution relieves us of the

need to reach the taxpayers' argument against the retroactive application of the regulation, we find

troubling the Commissioner's understanding of the appropriate burden to be placed upon taxpayers

seeking to comply with the Code. According to the taxpayers, they closely examined the Code and

accompanying regulations available at the time they conceived their business plan. According to the

Commissioner, the taxpayers were wanting in diligence; somehow, they were obliged not only to

consult the legislative history, but to glean therefromthe doubtful conclusion that their credits would

be disallowed were they to relocate the buildings after rehabilitating them.

Thus to require similarly-situated taxpayers in the future to examine the legislative history

before relying upon the plain-spoken word of Congress would be to teach what we believe to be

a false and disruptive lesson in the law. It says to the bar that even an "unambiguous [and]

unequivocal" statute can never be dispositive; that, presumably under penalty of malpractice

liability, the oracles of legislative history, far into the dimmy past, must always be consulted.

This underminesthe clarity oflaw, and condemnslitigants(who, unlike us, must pay for it out

of their own pockets) to subsidizing historical research by lawyers.

Conroy, --- U.S. at ----, 113 S.Ct. at 1567 (Scalia, J., concurring) (brackets in original). Yet this

"false and disruptive lesson in the law" is precisely that which the TaxCourt took upon itselfto teach

the taxpayersin this case. "Confronted with recently enacted legislation, and in light of the magnitude

of their rehabilitation project," the court stated, "petitionersshould have examined the statute and its

background in greater detail prior to proceeding with the purchase of the buildings." Nalle, 99 T.C.

at 196. We disagree and, accordingly, REVERSE the decision of the Tax Court.