Court Opinion

ID: 4472752
Source: CourtListenerOpinion
Date Created: 2020-01-14 19:34:53.619841+00
Date Added: 2024-06-11T12:01:33.987838
License: Public Domain

Laro,- J.,- concurring: I agree with the majority opinion. I write separately, however, to emphasize the invalidity of section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., 52 Fed. Reg. 48409 (Dec. 22, 1987), for reasons additional to those stated by the majority. Before the Tax Reform Act of 1986 (TRA), Pub. L. 99 — 514, 100 Stat. 2085, this and other courts allowed an individual to deduct interest on his or her income tax liability as a business expense under sections 62(a)(1) and 162(a), see, e.g., Standing v. Commissioner, 28 T.C. 789, 795 (1957), affd. 259 F.2d 450 (4th Cir. 1958), or a nonbusiness itemized deduction, sec. 163(a).1 Thus, the courts allowed an individual to compute adjusted gross income (AGl) under section 62(a)(1) by deducting deficiency interest that was an ordinary and necessary expense under section 162(a), irrespective of the provisions of section 163 and independent of whether the individual itemized his or her deductions. See generally Bittker & Lokken, Federal Taxation of Income, Estates and Gifts, par. 31.1.1, at 31-2 (2d ed. 1990) (“Since, even in the absence of § 163(a), interest attributable to business or profit-oriented transactions would be deductable under §162 * * * or §212 * * *, the principal function of §163(a) is to permit the deduction of interest on consumer debt”). The courts also allowed an individual to deduct deficiency interest that was an ordinary and necessary business expense under section 162(a) in order to compute a net operating loss (nol) under section 172(d)(4). Polk v. Commissioner, 31 T.C. 412, 415 (1958), affd. 276 F.2d 601 (10th Cir. 1960). The Commissioner disagrees with the courts’ view. According to her, interest on an income tax liability attributable to a business is not deductible by an individual in computing AGI. In Rev. Rui. 58-142, 1958-1 C.B. 147, the Commissioner stated that an individual’s payment of State income taxes, interest on State and Federal income taxes, and litigation expenses related to these taxes was “not attributable to a trade or business”, even if these expenses were related to business income or deductible under section 212. The Commissioner ruled that these State income taxes, interest on State and Federal income taxes, and litigation expenses were not deductible from gross income in computing AGI under former section 62(a)(1). The Commissioner also ruled that these State income taxes, interest on State and Federal income taxes, and litigation expenses did not generate an NOL under section 172(d)(4). The Commissioner’s ruling in Rev. Rui. 58-142, supra, with respect to AGI, was based on former section 1.62-l(d), Proposed Income Tax Regs., 21 Fed. Reg. 8403 (Nov. 2, 1956), which provided: To be deductible for the purposes of determining adjusted gross income, expenses must be those directly, and not those merely remotely, connected with the conduct of a trade or business. For example, taxes are deductible in arriving at adjusted gross income only if they constitute expenditures directly attributable to a trade or business or to property from which rents or royalties are derived. Thus, property taxes paid or incurred on real property used in a trade or business are deductible, but State taxes on net income are not deductible even though the taxpayer’s income is derived from the conduct of a trade or business. The Commissioner’s ruling with respect to the NOL was primarily based on this Court’s decisions in Maxcy v. Commissioner, 26 T.C. 526 (1956), and Aaron v. Commissioner, 22 T.C. 1370 (1954). In Maxcy v. Commissioner, supra at 527, the Court held that the taxpayer failed to prove that he could compute an NOL by deducting from his gross income a claimed business expense of interest on underpayments of personal income tax. In Aaron v. Commissioner, supra at 1376, the Court sustained the Commissioner’s determination that the taxpayer could not compute an NOL by deducting the State income taxes that he claimed were related to his business income. According to the Court, the phrase “attributable to” meant that an expense had to bear a “direct relation” to the individual’s business. Id. In Rev. Rui. 70-40, 1970-1 C.B. 50, the Commissioner reconsidered and reversed her position in Rev. Rui. 58-142, supra, insofar as it held that State income taxes, deficiency interest, and litigation expenses related to a taxpayer’s business income were nondeductible nonbusiness expenses for purposes of determining an NOL.2 Prior to her reconsideration, this and other courts had consistently rejected that position. First, in Standing v. Commissioner, supra at 795, this Court held that the taxpayer’s deficiency interest and professional fees were deductible as business expenses under sections 22(n)(l) and 23(a)(1)(A) of the 1939 Code, in arriving at AGI.3 In Standing, the taxpayer was the sole proprietor of two businesses. The Commissioner audited the taxpayer’s 1945 through 1949 individual income tax returns, and the taxpayer retained an attorney and an accountant to assist him in the audit. The taxpayer and the Commissioner settled the matter; substantially all of the agreed-upon deficiencies were proximately related to the taxpayer’s businesses. The taxpayer later claimed a business deduction for the deficiency interest and the professional fees incurred with respect to the deficiencies. The Commissioner disallowed these expenses as business deductions from gross income mainly because the expenses had no connection with the taxpayer’s business. We disagreed. We held that the interest and the fees were “ordinary and necessary expenses paid or incurred during the taxable year in carrying on * * * [the taxpayer’s] trade or business” within the meaning of section 23(a)(1)(A) of the 1939 Code. Standing v. Commissioner, supra at 793. The Court of Appeals for the Fourth Circuit affirmed our decision allowing these deductions. Commissioner v. Standing, 259 F.2d at 456. Subsequently, in Polk v. Commissioner, supra at 414-415, this Court held that interest on an income tax deficiency stemming from the Commissioner’s revaluation of the taxpayer’s livestock inventory was deductible as a business expense for purposes of computing an NOL. In so holding, this Court stated that the case was “clearly controlled” by Standing. Polk v. Commissioner, supra at 415. We also stated that the deficiency interest was deductible as a business expense because the deficiency “arose in connection with * * * [the taxpayer’s] business, and was proximately related thereto, and that the same must be said of the interest paid thereon.” Id. We distinguished Maxcy v. Commissioner, 26 T.C. 526 (1956), on which the Commissioner relied, by concluding: The Opinion in that case includes the following (p. 527): “The burden is on * * * [the taxpayer] to demonstrate the clear allowability of the deduction. This burden he has failed to carry.” In the instant case, however, as in Standing, supra, * * * [the taxpayer’s] burden is clearly and fully met. We have carefully reexamined the problem, and we see no occasion to depart from the reasoning and principles established by the Court of Appeals for the Fourth Circuit, and by this Court, in Standing. [Polk v. Commissioner, supra at 415.] On appeal, the Court of Appeals for the Tenth Circuit agreed that these amounts were deductible. Commissioner v. Polk, 276 F.2d at 604. According to the court, a taxpayer may compute an NOL by deducting deficiency interest from gross income as a business expense if the interest is an ordinary and necessary expense incurred in the operation of the business. The court stated that the assessment of additional income taxes related to the valuation of livestock is ordinary and necessary to the conduct of a livestock business because people may disagree on the value of livestock. Id. at 603. Shortly thereafter, this Court reached a result consistent with Polk and Standing in our Court-reviewed opinion in Reise v. Commissioner, 35 T.C. 571 (1961), affd. 299 F.2d 380 (7th Cir. 1962). We held in Reise that State income taxes, deficiencies in State income taxes, interest on State and Federal income taxes, and litigation expenses relating primarily to an individual’s business income were deductible as ordinary and necessary business expenses in computing an NOL carryback. We carefully reviewed the relevant statutes, the legislative history, the administrative interpretations of these provisions, and the caselaw (including Polk, Standing, Maxcy, and Aaron). We concluded that Standing and Polk are “sound and correct”, and Aaron is not. Id. at 579. We applied the rationale of Polk and Standing, and we overruled Aaron as an improper and incorrect construction of section 122(d)(5) of the 1939 Code.4 Id. This and other courts have steadfastly followed the judicial reasoning that we enunciated in Reise, Polk, and Standing. Indeed, in Estate of Broadhead v. Commissioner, T.C. Memo. 1966-26, affd. 391 F.2d 841 (5th Cir. 1968), we were obliged to distinguish Standing, in holding that the taxpayer could not claim a business expense deduction for interest on his Federal income tax deficiencies because he failed to show that the deficiencies were related to his business income. Similarly, in Tanner v. Commissioner, 45 T.C. 145, 149-150 (1965), affd. per curiam 363 F.2d 36 (4th Cir. 1966), we w;ere obliged to distinguish Standing, in refusing to allow a deduction for State income taxes under former section 62(a)(1). We reasoned that, whereas former section 62(a)(1) was silent on the deductibility of interest and legal expenses attributable to the underpayment of business income, former section 62(a)(1) and its legislative history clearly barred an individual from deducting the State income taxes on business income. It is with this backdrop that I proceed to address the validity of the regulations at hand. The Commissioner claims that she validly prescribed section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., 52 Fed. Reg. 48409 (Dec. 22, 1987), based on the legislative history of section 163(h) and the Staff of Joint Comm, on Taxation, General Explanation of the Tax Reform Act of 1986, át 266 (J. Comm. Print 1987) (the 1986 Bluebook).5 According to her, the Congress enacted section 163(h), in part, to prohibit an individual from deducting interest on an income tax liability attributable to his or her trade or business. I disagree. First, there is no reason to resort to the legislative history of section 163(h). A statute speaks for itself, and its legislative history should be sought,to embellish the text only when the meaning of the words therein is “inescapably ambiguous”. Garcia v. United States, 469 U.S. 70, 76 n.3 (1984); see also Ex parte Collett, 337 U.S. 55 (1949). The relevant text of section 163(h) reads: In the case of a taxpayer other than a corporation, no deduction shall be allowed under this chaptér for personal interest paid or accrued during the taxable year. * * * the term “personal interest” means any interest * * * other than— * * * interest paid or accrued on indebtedness properly allocable to a trade or business * * * [Sec. 163(h)(1) and (2)(A).] This text is not ambiguous. Interest paid on a debt that is properly allocable to a trade or business is not personal interest under section 163(h). Given the clarity of this text, the beginning and end of our inquiry should be the statutory text, and we should apply the plain and common meaning of the statute.6 TVA v. Hill, 437 U.S. 153 (1978); United States v. American Trucking Associations, Inc. 310 U.S. 534, 543-544 (1940). As the U.S. Supreme Court has said: canons of construction are no more than rules of thumb that help courts, determine the meaning of legislation, and in interpreting a statute a court should always turn first to one, cardinal canon before all others. We have stated time and time again that courts must presume that a legislature says in a statute what it means and means in a statute what it says there. * * * When the words of a statute are unambiguous, then, this first canon is also the last: judicial inquiry is complete. [Connecticut Natl. Bank v. Germain, 503 U.S. 249, 253-254 (1992); citations and quotation marks omitted.] Although a plain reading of the statute is ordinarily conclusive, I recognize that a clear legislative intent that is contrary to the text may sometimes lead to a different result. Consumer Prod. Safety Commn. v. GTE Sylvania, Inc., 447 U.S. 102, 108 (1980); see also Halpern v. Commissioner, 96 T.C. 895, 899 (1991) (only “unequivocal evidence” of legislative purpose in the history to a statute may override the plain meaning of the words therein). I find no clear and unequivocal legislative intent that would support the Commissioner’s taking a position in section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., supra, that is inconsistent with the statute. The conference report to the TRA states that “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 in computing the taxpayer’s income or loss from passive activities for the year.” H. Conf. Rept. 99-841, at 11-154 (1986), 1986-3 C.B. (Vol. 4) 1, 154; see also S. Rept. 99-313, at 804-806, 1986-3 C.B. (Vol. 3) 1, 804-806. Although the conference report further states that “Personal interest also generally includes interest on tax deficiencies”, H. Conf. Rept. 99-841, supra at 11-154, 1986-3 C.B. (Vol. 4) at 154, I agree with the majority that this reference is to tax deficiencies that are not business related. I do not believe that the Congress meant to change sub silentio the pre-existing judicial view that interest on income tax deficiencies attributable to a trade or business is deductible. I conclude that the disallowance for personal interest in section 163(h)(2) relates only to interest not qualifying as a trade or business expense under section 62(a)(1) or 162(a). My conclusion is not changed by the broad interpretation given to section 163(h)(2) by the Joint Committee in the 1986 Bluebook. I give little weight to this broad interpretation. Flood v. United States, 33 F.3d 1174, 1178 (9th Cir. 1994); Slaven v. BP America, Inc., 973 F.2d 1468, 1475 (9th Cir. 1992). The 1986 Bluebook is not legislative history; it was written after the enactment of the tra. See Flood v. United States, supra at 1178; McDonald v. Commissioner, 764 F.2d 322, 336-337 n.25 (5th Cir. 1985), affg. T.C. Memo. 1983-197; 1 Mertens, Law of Federal Income Taxation, sec. 3.20, at 31 (1994). It was not approved by the Congress before its release. See Estate of Hutchinson v. Commissioner, 765 F.2d 665, 669-670 (7th Cir. 1985), affg. T.C. Memo. 1984-55. It does not comport with the text of section 163(h) or the legislative history thereunder. I recognize that both the U.S. Supreme Court and this Court have relied on the Blue Book, see, e.g., FPC v. Memphis Light, Gas & Water Div., 411 U.S. 458, 471-472 (1973); Estate of Sachs v. Commissioner, 88 T.C. 769, 775 (1987), affd. in part and revd. in part 856 F.2d 1158 (8th Cir. 1988), and that it is entitled to great respect, Estate of Hutchinson v. Commissioner, supra at 669-670; McDonald v. Commissioner, supra at 336-337 n.25. All the same, we should not be bound by statements in the 1986 Bluebook that are unsupported by and contrary to section 163 and its legislative history. The nuts and bolts of this case is that the Commissioner continues to disagree with the pre-TRA judicial view that an individual engaged in a trade or business may deduct from gross income the amount of interest on a Federal income tax liability that is attributable to his or her business. Thus, the Commissioner prescribed her position into section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., supra, under the guise of the tra’s amendments to section 163. Section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., supra, is inconsistent with section 163(h). The nondeductibility of personal interest does not apply to interest on a Federal income tax liability that is properly allocable to a trade or business. Sec. 163(h)(2)(A). Interest on a Federal income tax liability that is properly allocable to a trade or business is deductible under section 162(a) if the incurrence of the interest is ordinary and necessary to the trade or business. If the Congress had intended to disallow any deduction for deficiency interest that was an ordinary and necessary business expense under section 162(a), the Congress would have said so. Instead, the Congress clearly stated that personal interest does not include “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)”. Sec. 165(h)(2)(A). Because the Commissioner’s prescription of section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., supra, is inconsistent with the statute (and is not within the “legislature’s revealed design” for the TRA’s amendments to section 163, NationsBank v. Variable Annuity Life Ins. Co., 513 U.S. _, _, 115 S. Ct. 810, 813-814 (1995)), I concur in the . majority’s holding that it is outside the bounds of her regulatory authority under section 7805(a).7 Section 1.163-9T(b)(2)(i)(A),. Temporary Income Tax Regs., supra, is invalid. Accord Professional Equities, Inc. v. Commissioner, 89 T.C. 165 (1987); Stephenson Trust v. Commissioner, 81 T.C. 283 (1983); see RLC Indus. Co. v. Commissioner, 58 F.3d 413, 418 (9th Cir. 1995), affg. 98 T.C. 457 (1992). Swift, Wright, Parr, and Vasquez, JJ., agree with this concurring opinion.   Whether the interest was deductible as a business expense or a nonbusiness itemized deduction depended.on the. character of the income tax liability.    At the same time, the Commissioner reaffirmed her view that these expenses were not deductible in computing AGI. The Commissioner explained her inconsistency in these two views by noting that the legislative history of sec. 172(d)(4) contained no language comparable to the language In the legislative history of former sec. 62(a)(1), which stated that expenses deductible in arriving at AGI must be “directly incurred” (emphasis added) in carrying on a trade or business, and that State income taxes are not directly incurred. Rev. Rui. 70-40, 1970-1 C.B. 50, 50-51.    Sec. 22(n)(l) of the 1939 Code provides that'AGI equals gross income less “deductions allowed by section 23 which are attributable to a trade or business carried on by the taxpayer, if such trade or business does not consist of the performance of services by the taxpayer as an employee”. Sec. 23(a)(1) of the 1939 Code allows for the deduction of “All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business”. The language of secs. 22(n)(l) and 23(a)(1) is essentially verbatim with the language of secs. 62(a)(1) and 162(a), respectively.    The text of sec. 122(d)(5) of the 1939 Code is virtually identical to the text of sec. 172(d)(4).    The Joint Committee on Taxation for the 100th Congress (Joint Committee) consisted of five Senators and five members of the House of Representatives. The 1986 Bluebook, at II. The 1986 Bluebook was prepared by the Staff of the Joint Committee, in consultation with the staffs of the House Ways and Means Committee and the Senate Finance Committee. Letter from David H. Brockway, Chief of Staff, to the Hon. Dan Rostenkowski, Chairman, and the Hon. Lloyd Bentsen, Vice-Chairman. Id. at XVII. According to 1 Mertens, Law of Federal Income Taxation, sec. 3.20, at 31 (1994): The purpose of the Blue Book is to provide, in one volume, a compilation of the legislative history of a piece of tax legislation. While the document is most helpful as a handy reference volume it also gives some guidance. Where the Blue Book’s explanation differs from that in a conference report it may serve to alert the reader that a technical correction is needed to reconcile the views. [Emphasis added.]    Indeed, the Commissioner has done just that with respect to the term “properly allocable”. The Commissioner prescribed sec. 1.163-8T, Temporary Income Tax Regs., to determine the amount of interest that is properly allocable to a trade or business. Sec. 1.163-9T(b)(l)(i), Temporary Income Tax Regs., 52 Fed. Reg. 48409 (Dec. 22, 1987). Sec. 1.163-8T(a)(3), (4)(i)(A), (b)(7), and (c)(3)(ii), Temporary Income Tax Regs., 52 Fed. Reg. 24999-25001 (July 2, 1987), provides that interest is properly alloGable to a trade or business to the extent that the proceeds of the underlying debt are traceable to an “expenditure i: * * in connection with the conduct of any trade or business”. But for sec. 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., 52 Fed. Reg. 48409 (Dec. 22, 1987), there should be no dispute that petitioners may deduct their deficiency interest because the interest is connected to the Federal income taxes that they must pay on their business income. Fort Howard Corp. & Subs. v. Commissioner, 103 T.C. 345, 352 (1994) (an expense is incurred “in connection with” the conduct of a trade orbusiness if it is associated with or logically related); Polk v. Commissioner, 31 T.C. 412, 415 (1958) (deficiency interest deductible as a business expense because the deficiency “arose in connection with i- * * [the taxpayer’s] business, and was proximately related thereto, and that the same must be said of the interest paid thereon”), affd. 276 F.2d 601 (10th Cir. 1960); see also Reise v. Commissioner, 35 T.C. 571 (1961), and the cases cited therein, affd. 299 F.2d 380 (7th Cir. 1962).    I note that the Commissioner’s position in the instant case is inconsistent with a recent administrative position of hers. In Rev. Rul. 92-29, 1992-1 C.B. 20, the Commissioner modified Rev. Rul. 70-40, 1970-1 C.B. 50, to state that sec. 62(a)(1) allows an individual to deduct litigation expenses incurred in determining State and Federal income taxes on income derived from his or her trade or business. The recent ruling also states that an individual may deduct the portion of a tax preparation fee that is attributable to his or her sole-proprietor business. Given the Commissioner’s position with respect to these litigation expenses and tax preparation fees, I am unable to fathom why she continues to believe that the interest on a tax deficiency that is allocable to a trade or business is not also deductible.