Court Opinion

ID: 4474253
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:10:51.29883+00
Date Added: 2024-06-11T12:23:12.584013
License: Public Domain

Wells, C.J., dissenting: I respectfully dissent from the majority’s refusal to follow Redlark v. Commissioner, 106 T.C. 31 (1996), revd. and remanded 141 F.3d 936 (9th Cir. 1998). The meaning of section 163(h)(2)(A) can be discerned from a plain reading of the language of that section. Moreover, prior caselaw defined the required nexus between an interest expense on a deficiency and a trade or business, and Congress did not indicate any intent to overturn these cases.x Also, the majority placed undue emphasis and reliance on the Blue Book in validating section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., 52 Fed. Reg. 48407 (Dec. 22, 1987), in contravention of precedent. The majority contends that the language of section 163(h)(2)(A) is ambiguous, but the majority provides little analysis of the statute itself. Section 163(h)(2)(A) provides as follows:. SEC. 163(h). Disallowance op Deduction for Personal Interest.— (1) In general. — In the case of a taxpayer other than a corporation, no deduction shall be allowed under this chapter for personal interest paid or accrued during the taxable year. (2) Personal interest. — For purposes of this 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 trade or business (other than the trade or business of performing services as an employee). Petitioners 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 section 163(h)(1) disallows personal interest deductions, the reach of that section is truncated by section 163(h)(2)(A), which excepts interest “properly allocable” to a trade or business from the definition of personal interest. Congress did not provide a definition for interest “properly allocable” to a trade or business. In interpreting what Congress meant by “properly allocable” to a trade or business, however, courts should give the phrase “properly allocable” its usual or plain meaning. United States v. Urrabazo, 234 F.3d 904 (5th Cir. 2000). A reasonable reading of the phrase “properly allocable” would conclude that the phrase means fairly or correctly relating to a trade or business. Interest paid on deficiencies arising from deductions taken by a sole proprietorship should fall within this class of interest. Courts should only depart from the plain language of a statute to “avoid a result so bizarre that Congress could not have intended it”. Withrow v. Roell, 288 F.3d 199, 203 (5th Cir. 2002). Reaching the conclusion that the interest paid on a deficiency arising from a sole proprietorship is “properly allocable” to a trade or business is surely not a bizarre result. The intent of Congress is best determined by examining the language of the statute. Dial One, Inc. v. BellSouth Telecomms., Inc., 269 F.3d 523 (5th Cir. 2001). Congress defined the types of interest excepted from “personal interest” by direct references to other Code sections, except for interest “properly allocable” to trade or business income. From this it can be inferred that the intent of Congress was to use the plain meaning of the term “properly allocable” to trade or business interest. In section 163(h)(2)(B), Congress refers to section 163(d) for a definition of investment interest. In section 163(h)(2)(C), Congress refers to section 469 for the definition of portfolio interest. In section 163(h)(2)(D), Congress refers to section 163(h)(3) for a definition of qualified residence interest. In section 163(h)(2)(E), Congress refers to section 6601. Finally, in section 163(h)(2)(F), Congress refers to section 221 for a definition of interest on educational loans. 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. Simmons v. United States, 308 F.2d 938, 943-944 (5th Cir. 1962). Section 469(e)(l)(A)(i)(II) and (III) provides: 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 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 section 163(h)(2)(A). As originally enacted, section 163(h)(2)(A) read “incurred or continued in connection with the conduct of” and was changed in 1988 to “properly allocable”.1 This was done in an effort to harmonize section 163(h)(2)(A) with section 469(e). When Congress enacted section 469(e) and later amended section 163(h)(2)(A), it had the opportunity to place limits on the relationship that an interest expense must bear to the conduct of an active trade or business. Congress explicitly limited the “clearly and directly allocable” standard to business expenses and the “properly allocable” standard to interest expenses. It reasonably can be inferred that “clearly and directly allocable” is more restrictive than “properly allocable”. Congress could have used the same standard, “clearly and directly” in sections 469(e) and 163(h)(2)(A), yet, instead, used the “properly allocable” standard for section 163(h)(2)(A). Caselaw prior to the enactment of section 163(h)(2)(A) defined the nexus between an interest expense and a trade or business. An interest expense arising from a deficiency related to a trade or business was treated like other business expenses and could be deducted by a sole proprietorship. Standing v. Commissioner, 28 T.C. 789 (1957) affd. 259 F.2d 450 (4th Cir. 1958); see Polk v. Commissioner, 31 T.C. 412 (1958), affd. 276 F.2d 601 (10th Cir. 1960); see also Reise v. Commissioner, 35 T.C. 571 (1961), affd. 299 F.2d 380 (7th Cir. 1962). The above cases relied on sections 22(n)(l), 23(a)(1)(A), and 122(d)(5) of the Internal Revenue Code of 1939. This definition comports with the holding in United States v. Gilmore, 372 U.S. 39, 49 (1963), which provided that the relevant inquiry is whether “the origin and character of the claim with respect to which an expense was incurred * * * is the controlling basic test of whether the expense was ‘business’ or ‘personal’”. Congress is considered to be aware of these cases and the decisions existing before enactment of legislation. Dresser Indus., Inc. v. United States, 238 F.3d 603 (5th Cir. 2001). Congress is considered to be aware of “all pertinent judgments by our branch.” United States v. Barlow, 41 F.3d 935, 943 (5th Cir. 1994). Thus, Congress is considered to have been aware of Standing, Polk, and Reise when enacting section 163(h)(2)(A). The majority contends that Standing, Polk, and Reise were rendered ineffective by the passage of section 163(h)(2)(A) because section 163(h)(2)(A) is different from the statutes on which the holdings of those cases were based, and thus this change in language indicates a change in the meaning of the statute. Majority op. p. 61 (citing Russello v. United States, 464 U.S. 16 (1983)). However, it is well settled that when Congress seeks to overturn prior caselaw, it must do so in an explicit manner; an implicit inference to change the status quo is impermissible. Bush v. Oceans Intl., 621 F.2d 207 (5th Cir. 1980); see Sea-Land Serv., Inc. v. United States, 874 F.2d 169, 172-173 (3d Cir. 1989). Where Congress intends to overturn prior law, it must do so in “clear, unmistakable, and unarguable language.” United States v. Singleton, 165 F.3d 1297, 1302 (10th Cir. 1999). Conference committee reports are valuable in determining whether Congress intended to overturn prior law. Sea-Land Serv., Inc. v. United States, supra; see United States v. Edwards, 23 F.2d 477 (8th Cir. 1927). 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 (TRA 1986), 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 secs. 23(a)(1)(A), 22(n), 122(d)(5), I.R.C., 1939. The majority argues that this language is different from the language “interest paid or accrued on indebtedness incurred or continued in connection with the conduct of a trade or business” and the Technical and Miscellaneous Revenue Act of 1988 (TAMRA 1988), Pub. L. 100-647, sec. 1005(c)(4), 102 Stat. 3390, language, and because of this difference, the sections have a different meaning. In Russello, the Supreme Court analyzed the substantive differences between the two provisions in question. Russello v. United States, supra at 22-24 (examining the substantive changes and history of 18 U.S.C. sec. 1963(a)(1) (1970), the Racketeer Influenced and Corrupt Organizations Act). In Russello, the Supreme Court determined that Congress expanded a provision beyond its original scope. Id. The majority has not engaged in such an analysis. Additionally, the Supreme Court was construing language in the same statute in Russello, whereas, in the instant case, there are several statutes in question. Moreover, it is not necessarily clear that the pre-TRA 1986 language is substantively different from the 1986 language and the TAMRA 1988 language. The argument that a simple change indicates a different meaning seems to fail in the context of TRA 1986 and TAMRA 1998, where Congress replaced “interest paid or accrued on indebtedness incurred or continued in connection with the conduct of a trade or business” in section 163(h)(2)(A) with “properly allocable”. The TAMRA 1988 conference committee report does not indicate an intent to change the meaning or reach of section 163(h)(2)(A). However, reverting to the plain meaning of these two phrases, it is reasonable to assert that they have the same meaning even though the language is different. The same should be true for the pre-TRA 1986 language. The majority concludes that the language of section 163(h)(2)(A) is ambiguous, which requires an examination of the legislative history of section 163(h)(2)(A), as mandated by Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc. 467 U.S. 837 (1984). The Joint Statement of Managers of the Conference Report, H. Conf. Rept. 99-841 (Vol. II), at 11-151 to 11-154 (1986), 1986-3 C.B. (Vol. 4) 154, published September 18, 1986 (conference committee report), provides: Under the conference agreement, personal interest is not deductible. Personal interest is any interest, other than interest incurred or continued in connection with the conduct of a trade or business (other than the trade or business of performing services as a 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. p. 64. 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.” Bregin v. Commissioner, 74 T.C. 1097, 1101-1102 (1980). The plain language of the conference committee report supports petitioners because it excepts from personal interest “interest incurred or continued in connection with the conduct of a trade or business.” H. Conf. Rept. 99-841, at 11-154, supra, 1986-3 C.B. (Vol. 4) at 154. The interest was incurred as a result of a tax deficiency arising from the operation of a sole proprietorship. The final sentence in the above passage does not detract from this reading. “Generally” is defined as “in disregard of specific instances and with regard to an overall picture.” Webster’s Tenth Collegiate Dictionary 485 (1998). The use of the term “generally” indicates that the conference committee understood that personal interest usually includes interest on tax deficiencies; however, there are exceptions to this rule. A reasonable inference would be that interest on tax deficiencies arising from a sole proprietorship are not within personal interest because the previous sentence excepted that class of interest from “personal interest”. If the conference committee intended all interest on deficiencies to be included in personal interest, then the conference committee could have left the word “generally” out of the last sentence, so that personal interest would cover all interest on deficiencies. 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, at 262-264, 266, published May 4, 1987 (Blue Book). Majority op. p. 64. 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 section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., supra, and refusing to follow Redlark v. Commissioner, 106 T.C. 31 (1996), the majority provides: As applied to the instant case, section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., supra, treats petitioners’ payment of interest on their 1987 income tax underpayment as nondeductible “personal interest”. The text of section 163(h)(2)(A) does not compel this result. The relevant legislative history, however, lends some support to this interpretation of the statute. [Majority op. p. 73.] 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 TRA 1986. The majority argues the staff summary, which was produced before TRA 1986 was enacted, corroborates assertions made in the Blue Book regarding personal interest. 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 TRA 1986 because it was published in May 1987. McDonald v. Commissioner, 764 F.2d 322 (5th Cir. 1985), affg. T.C. Memo 1983-197; see Zinniel v. Commissioner, 89 T.C. 357 (1987). A staff summary explanation provided after the enactment of a provision is not legislative history. Guilzon v. Commissioner, 985 F.2d 819 (5th Cir. 1993), affg. 97 T.C. 237 (1991); see Zinniel v. Commissioner, supra. The staff summary explanation cannot be considered part of the legislative history because it was authored by congressional staff, the staff of the Joint Committee on Taxation, and not by Congress. Estate of Hutchinson v. Commissioner, 765 F.2d 665 (7th Cir. 1985), affg. T.C. Memo. 1984-55. The staff summary, however, may be given some deference, especially when the staff views expressed are consistent with items of legislative history. Id. 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 on the Blue Book in validating section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., supra, must be rejected. Section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., supra, was not promulgated as part of a legislative mandate permitting the Commissioner to write regulations. Rather, those regulations were promulgated pursuant to the Commissioner’s section 7805(a) general power to promulgate interpretative regulations. An interpretative regulation warrants less deference than a legislative regulation. United States v. Vogel Fertilizer Co., 455 U.S. 16, 24 (1982). Congress did grant the Commissioner the power to enact legislative regulations with respect to some provisions of section 163, but not with regard to section 163(h)(2)(A).3 The Commissioner has not promulgated permanent regulations despite the fact that this temporary regulation was first promulgated in 1987. Finally, the majority’s validation of section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., supra, begs a significant policy question, and that is whether Congress ever intended to deny individuals doing business through sole proprietorships the advantages they would enjoy had they engaged as a corporate form. See Redlark v. Commissioner, 106 T.C. at 40-41. In the year before TRA 1986 was enacted, there were 11,928,738 nonfarm sole proprietorship returns filed with the Internal Revenue Service,4 and as of 1999, there were 17,575,643 nonfarm sole proprietorship returns filed with the Internal Revenue Service.5 It is difficult to imagine that Congress was not aware of the number of individuals engaged in sole proprietorships in 1986. It is even more difficult to comprehend that Congress would deny this large segment of the business world a deduction for interest, which I believe is clearly allocable to a trade or business, without more discussion in the legislative history, or at least a clear directive to the Commissioner to effect such a policy. To permit such a result is to allow the Commissioner to make an end run around the legislative powers of Congress. For the foregoing reasons, I respectfully dissent. Swift, Colvin, Laro, and Vasquez, JJ., agree with this dissenting opinion.   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).    The Blue Book states: “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).    See Judge Swift’s dissent infra p. 108. See generally Judge Vasquez’s dissent.    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.    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.