Court Opinion

ID: 4472265
Source: CourtListenerOpinion
Date Created: 2020-01-13 23:21:24.5623+00
Date Added: 2024-06-11T14:53:49.050209
License: Public Domain

Tannenwald, J., dissenting: With all due respect to the Court of Appeals for the Fourth Circuit, I would adhere to our prior decision in Beyer v. Commissioner, 92 T.C. 1304 (1989), revd. 916 F.2d 153 (4th Cir. 1990). I find the analysis of the majority and the Court of Appeals in support of the opposite conclusion unpersuasive in terms of the language of section 163(d), its relevant legislative history, and the policy underlying its enactment. The critical issue herein is the meaning of the phrase “not allowable” in section 163(d)(3)(E). The majority and the Court of Appeals take the position that the phrase means “not permitted” and that, because interest is generally deductible under section 163(a), it is “permitted” and therefore, to the extent that it is subject to the limitation of section 163(d)(1), such interest is “not allowable as a deduction solely by reason of” (emphasis added) that limitation. Sec. 163(d)(3)(E). In support of this analysis, the majority points to section 1016(a)(2), which deals with the reduction of basis by the amount of depreciation “allowed” but “not less than the amount allowable”. The Court of Appeals in Beyer v. Commissioner, supra, also points to provisions such as those of section 265, which specifically disallow the deduction of interest incurred to purchase tax-free obligations.1  Section 1016 is not analogous in that it deals with a reduction in basis rather than a deduction and represents specific legislative action based on a solid policy foundation which, as will subsequently appear, is lacking in the instant situation. See Virginian Hotel Corp. v. Helvering, 319 U.S. 523 (1943). As far as section 265 and similar provisions, which specifically disallow certain deductions, are concerned, it does not necessarily follow, from the absence of a specific statutory provision disallowing the deduction of interest in excess of taxable income, that section 163(d)(2) should be given an affirmative gloss to allow such a deduction. The fact of the matter is that a reading of the legislative history of section 163 shows that Congress was directing its attention to situations where taxpayers, in the shelter area, were currently deducting from unrelated income the excess of investment interest expense over investment income. Such being the case, the meaning of the phrase “not allowable” can be related to usability. Indeed, a meaning of permissibility instead of usability runs counter to the principle that a negative income concept has no place in the application of the tax law except as specifically recognized by Congress, for example, in section 172 relating to net operating loss carrybacks and carryforwards. Cf. Tebon v. Commissioner, 55 T.C. 410 (1970), where we rejected the taxpayer’s contention that for the purpose of income averaging under section 1302, the term “taxable income” must include “negative taxable income” and held that taxable income could not be less than zero. See also Title Ins. & Trust Co. v. United States, 654 F.2d 604 (9th Cir. 1981). To be sure, the validity of a regulation was involved in these cases, but the regulation could not have been sustained if the phrase “taxable income” used in defining “base period income” under section 1302 had a clear meaning which included a negative amount. In short, I am not persuaded that the meaning of “not allowable” is as set in concrete as the majority concludes, particularly since acceding to petitioners’ position and that of the Fourth Circuit would have the effect of allowing a deduction, which was clearly not allowable prior to the enactment of section 163, without a specific expression by Congress of its intent to do so. In this context, I think it significant that the heading of section 163(d) is “Limitation on Interest on Investment Indebtedness” (emphasis added) — an element which the majority conveniently ignores. Under these circumstances, I think that the statutory language at issue herein is sufficiently ambiguous to permit interpretative analysis so as to give effect to the intent of Congress and the policy objective of section 163(d) as a whole. See Fehlhaber v. Commissioner, 94 T.C. 863, 865-866 (1990), affd. 954 F.2d 653 (11th Cir. 1992); see also Helvering v. Stockholms Enskilda Bank, 293 U.S. 84 (1934). The critical elements of the legislative history are dealt with in the majority opinion herein as well as in our prior opinion in Beyer v. Commissioner, 92 T.C. at 1308-1310, and that of the Court of Appeals, Beyer v. Commissioner, 916 F.2d at 156-157, and do not require repetition.2 However, a few comments on the majority’s and the Fourth Circuit’s interpretation of that history are in order. While it is true that the Senate did not enact the House version of section 163(d) in 1969, neither did it reject that version; the Senate simply accepted the suggestion of the executive branch at the time that action on excess investment interest be deferred pending further investigation of some of the problems the House version appeared to present. Further, I do not attach the same importance as the majority does to the fact that the original 1969 bill to which the above-mentioned House report related, H.R. 13270, sec. 221, 91st Cong., 1st Sess. (1969), was phrased in terms of the amount of “disallowed investment interest” which was “disallowed as a deduction” and was changed to “not allowable as a deduction” in the 1969 act. The change seems simply to have been designed to avoid the redundancy of using the word “disallowed” twice in the same provision. Moreover, the interchangeable use by Congress of words and phrases such as “allowed” and “allowable” is reflected elsewhere in the Code. See, e.g., sec. 170(a)(1). Thus, the provision in the House report in 1969 specifically stating that the excess of disallowed investment interest over taxable income shall not be available as a carryover constitutes some reflection of legislative intent since, with modifications not relevant to the issue involved herein, Congress adopted the House version. See H. Rept. 91-413 (Part 1) (1969), 1969-3 C.B. 200, 246; see also Beyer v. Commissioner, 92 T.C. at 1308-1309. The same view is expressed in the General Explanation of the Tax Reform Act of 1969, prepared by the Staff of the Joint Committee on Internal Revenue Taxation, at 100 (J. Comm. Print 1970) (the Blue Book), a publication which we are entitled to take into account. See Beyer v. Commissioner, 92 T.C. at 1309 n.4. This view was again articulated at the time section 163(d) was amended by the Tax Reform Act of 1976, Pub. L. 94-455, sec. 209, 90 Stat. 1520, 1542. See Beyer v. Commissioner, 92 T.C. at 1309-1310. The Fourth Circuit dismissed the foregoing legislative history by noting other comments in the 1969 conference report and the 1976 Blue Book, which contain references to “unlimited” carryover of excess interest expense, references I view as having a time (how long) rather than a definitional (how much) significance. Petitioners also refer to the legislative action in 1986, which made substantial changes in section 163(d), as supporting their reading of the phrase “not allowable” and to respondent’s Publication 550 entitled “Interest Income and Expenses” as representing a change of position on respondent’s part. Leaving aside the question of the proper treatment of excess investment expenses incurred in years subsequent to 1986, a situation not before us herein, I do not find petitioners’ references as illuminating as they suggest. Indeed, this lack of illumination may well explain the failure of petitioners to cite any specific supporting references in such material. As far as underlying policy is concerned, I do not disagree with the majority that adoption of petitioners’ position will enable taxpayers to match investment expenses with investment income as realized. Nor do I disagree with the Court of Appeals’ observation that the absence of a full carryover may, over the long run, prevent this matching by taxpayers who have little noninvestment income. It is important to note, however, that the policy thus invoked was neither a primary nor an independent ground for legislative action. Rather, it was articulated as a supporting reason for enacting the limitation of section 163(d) in order to deal with the then-existing abuse in the shelter area where taxpayers were in fact currently benefiting from an investment interest deduction in excess of investment income. See H. Rept. 91-413 (Part 1), supra, 1969-3 C.B. at 245. As felicitous as it may be to provide for matching of investment income with investment expenses and for minimizing the loss of tax benefits which may flow from my position on the issue herein, it is up to the Congress and not this Court to make provision accordingly. In this connection, I think it significant that section 172, which deals with carryovers, specifically limits its benefits to business losses and excludes nonbusiness losses. The majority’s conclusion as to the scope of section 163(d) represents an erosion of the dichotomy embodied in section 172. If one concludes, as the majority and the Fourth Circuit do, that “not allowable” means “not permitted” and does not encompass deductions permitted but not used, it follows that section 163(d) does not “create” a deduction. See Beyer v. Commissioner, 916 F.2d at 155. However, if one concludes, as I do, that “not allowable” should be given the broader interpretation, then the action of the majority herein, as well as that of the Fourth Circuit, does create a deduction in the context of a statute which is labeled and was intended to be a limitation on an otherwise usable deduction. I would hold that disallowed investment interest expense in excess of taxable income fails to qualify as an amount that is “not allowable * * * solely by reason of” (emphasis added) the limitation of section 163(d)(1) and that consequently petitioners may not carry over such excess to subsequent years. Parker, Cohen, Gerber, Colvin, and Halpern, JJ., agree with this dissenting opinion.   Cf. sec. 264 (amounts paid in connection with insurance, or annuity contracts), sec. 266 (carrying charges which are chargeable to a capital account), and sec. 267 (interest with respect to transactions between related taxpayers).    For convenience, I list the various legislative documents which are involved herein: H. Rept. 91-413 (Part 1) (1969), 1969-3 C.B. 200, 245-246; H. Conf. Rept. 91-782 (1969), 1969-3 C.B. 644, 657-658; Staff of the Joint Comm, on Internal Revenue Taxation, General Explanation of the Tax Reform Act of 1969 (J. Comm. Print 1970); H. Rept. 94-658 (1975), 1976-3 C.B. (Vol. 2) 695, 794; S. Rept. 94-938 (Part 1) (1976), 1976-3 C.B. (Vol. 3) 49, 106-107; H. Conf. Rept. 94-1515, at 417-418 (1976); Staff of the Joint Comm, on Taxation, General Explanation of the Tax Reform Act of 1976, 1976-3 C.B. (Vol. 1) 411; H. Rept. 99-426 (1985), 1986-3 C.B. (Vol. 2) 1, 296-301; S. Rept. 99-313 (1986), 1986-3 C.B. (Vol. 3) 1, 802-808; H. Conf. Rept. 99-841 (1986), 1986-3 C.B. (Vol. 4) 1, 151-154; Staff of the Joint Comm, on Taxation, General Explanation of the Tax Reform Act of 1986 (J. Comm. Print 1987).