Court Opinion

ID: 4486472
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:34:27.602432+00
Date Added: 2024-06-11T15:03:49.939087
License: Public Domain

WELLS, J., concurring: In his dissent, Judge Gerber disagrees with the majority’s holding that the consolidated return regulations preempt section 461(e). While Judge Gerber questions the majority’s reasoning, he does not question the result and declines to decide what the result should be in the instant case. Without specifically disagreeing with the majority’s holding, I concur in the result reached by the majority on grounds separate from those upon which the majority relies. More particularly, I believe the regulation respondent seeks to enforce finds no support in the Code. Section 461(e) does not apply in the instant case. Section 461(e) prohibits savings and loan associations from deducting dividends or interest “to the extent such amounts are paid or credited for periods representing more than 12 months.” (Emphasis supplied.) The amounts deducted in the instant case represent a period not in excess of 6 months. Majority op. at 37. Therefore, by its express terms, section 461(e) does not apply to the facts at hand. While the instant case falls within the language of section 1.461-1(e)(1)(i), Income Tax Regs., which addresses dividends and interest representing periods in excess of a short period, that provision on its face is inconsistent with the express language of section 461(e), which addresses solely amounts representing more than 12 months. In Gamman v. Commissioner, 46 T.C. 1, 6-8 (1966), we held invalid a regulation which provided that if notes given by a subchapter S corporation were “actually stock,” they were automatically a second class of stock, resulting in the corporation’s disqualification for subchapter S treatment. We stated that the relevant statutory provision merely disqualified corporations with more than one class of stock and that a regulation may not “extend a statute or modify its provisions.” We also, however, inquired into legislative purpose and stated that we had found no evidence in legislative history that Congressional intent supported the regulation in issue in that case. Legislative history discloses that Congress enacted section 461(e) in order to prevent savings and loan associations and similar financial institutions from “bunching” interest payments into 1963 in order to avoid the effects of a curtailment of the bad debt reserve deduction that became effective in that year, making such institutions effectively taxable for the first time. H. Rept. 2544, 87th Cong., 2d Sess. (1962), 1962-3 C.B. 1235, 1236. Congress was concerned that those financial institutions might defer crediting of interest payments from 1962 (a year for which the institutions were not effectively taxable) to 1963 (the first year for which they became so taxable) and, by such manipulation, lessen their tax bite and decrease the revenues Congress anticipated the change would raise. See legislative history cited in majority op. at 13. The House Report also contains the following statement: “It is contemplated that in any cases involving a short year, the Secretary will use his regulatory authority already available to prevent the deduction in such years for periods in excess of the appropriate number of months, or portions of months.” 1962-3 C.B. at 1237. (Emphasis supplied.) Respondent argues that the foregoing statement is authority for section 1.461-l(e)(l)(i), Income Tax Regs. Respondent, however, understandably ignores the words “already available” and “in any cases,” appearing in the House Report. Those words indicate that when Congress enacted section 461(e) it thought that another Code section, already enacted, conferred upon respondent the authority to disallow, on a case by case basis, dividend and interest deductions attributable to periods in excess of short periods. Petitioners suggest that Congress might have been referring to section 446(b) (Reply Brief for Petitioners, p. 13), and I agree that that provision is most likely the provision that Congress had in mind. Respondent does not offer any other suggestion as to the source of the “already available” authority to which Congress referred. Moreover, respondent’s authority under section 446(b) reaches not only overall methods of accounting, but also a taxpayer’s method of accounting for specific items of income and expense, such as interest. Prabel v. Commissioner, 91 T.C. 1101, 1112 (1988), affd. 882 F.2d 820 (3d Cir. 1989), and authorities cited therein. Because it is clear that section 461(e) is not the authority for the regulation that respondent seeks to enforce in the instant case, I look next to whether section 446(b) provides authority for the regulation. I think it does not. Section 446(b) states as follows: “If no method of accounting has been used by the taxpayer, or if the method used does not clearly reflect income, the computation of taxable income shall be made under such method as, in the opinion of the Secretary, does clearly reflect income.” (Emphasis supplied.) While I agree that petitioners’ method of accounting for interest has distorted income (deduction of interest in an 8-day period, although interest accrued over a 6-month period on deposits which produced income over that same period), respondent’s method of accounting for the “excess” interest (by spreading deductions forward over a 10-year period) reasonably cannot be said to promote a clearer reflection of income, the express object of section 446(b). To the contrary, section 1.461-1(e)(1)(i), Income Tax Regs., makes nine-tenths of the excess interest deductible in future years, after the interest has accrued and after the deposits have left the financial institution and are no longer producing income. Income is most clearly reflected when income is matched to expenses incident to that income. United States v. Catto, 384 U.S. 102, 111 n. 15 (1966) (cash method of accounting for livestock expenses more convenient but less accurate than accrual method because of failure to match income and expense; taxpayers denied permission to switch to cash method with respect to breeding stock). Section 446(b) authorizes respondent to require accounting changes that produce clearer reflections of income, not greater distortions of income, such as that produced by the regulation in issue. Courts will not approve respondent’s change of a taxpayer’s accounting method from an incorrect method to another incorrect method. Prabel v. Commissioner, supra at 1112-1113; Harden v. Commissioner, 223 F.2d 418, 421 (10th Cir. 1955), revg. 21 T.C. 781 (1954). Such distortion might be why respondent does not argue that section 446(b) provides the authority for section 1.461-1(e)(1)(i), Income Tax Regs. Respondent merely argues that petitioners have distorted income and that section 461(e) and its legislative history provide the necessary authority for the regulation which he relies upon as a remedy. In other words, respondent has not suggested what method “does clearly reflect income” in the instant case, but only seeks compliance with the unsupported regulation. Because respondent has not made a determination under section 446(b), the question of whether or not he has abused his discretion under that provision is not in issue. See Prabel v. Commissioner, supra at 1112. Only the question of whether or not there is authority for the regulation is in issue. While the majority interprets respondent’s argument as a determination under section 446(b), after reviewing respondent’s briefs, I respectfully disagree with that conclusion. Respondent only claims that a distortion has occurred and that he has been given broad discretion to accept or reject a taxpayer’s method of accounting and method of computing taxable income, citing section 446(b) and the cases construing that section. Rather than seeking a remedy under section 446(b), however, respondent seeks the remedy the regulation in issue provides. Section 591 and Hudson City Savings Bank v. Commissioner, 53 T.C. 70 (1969), which held that section 591 prohibits savings and loan associations and similar financial institutions from deducting interest under the accrual method, raise doubts about whether respondent could have required accrual basis accounting for interest in the instant case by invoking section 446(b). In light of those doubts, I am puzzled by the statement in the legislative history that authority for a regulation respecting short periods was “already available.” Congress perhaps should have provided expressly by statute, if it so desired, such regulatory authority. Regarding the possibility that Congressional intent could be frustrated through adherence to a literal interpretation of the statute, I “cannot say that the legislative history * * * is so persuasive as to overcome the language of [the statute].” Commissioner v. Acker, 361 U.S. 87, 93 (1959) (Court invalidated a regulation which provided that failure to file a declaration of tax constituted the reporting of zero tax liability and subjected a taxpayer to an addition for “substantial underestimate,” resting its conclusion on the wording of the section imposing the addition and finding that the regulation was not supported by legislative history). The statement in the House Report, standing alone, leaves substantial doubt about what Congress intended as to short periods. A reading of other parts of the legislative history does not find support for the regulation. Although that history indicates that Congress wanted to avoid manipulative “bunching” into short periods, there is no indication whatsoever of what the proper remedy for such bunching might be. Thus, the 10-year amortization of excess interest cannot be approved upon the grounds that the rule furthers Congressional intent. In sum, I believe that neither section 461(e) nor section 446(b), nor any other Code section, supports the regulation invoked by respondent. In Gamman v. Commissioner, 46 T.C. at 6, we stated: the power of the Commissioner to prescribe regulations for the administration of the Federal tax laws is not the power to make law but is only the power to carry into effect the will of Congress as expressed by the statute. Manhattan Co. v. Commissioner, 297 U.S. 129. While I agree that inquiry into Congressional intent is not foreclosed, Congressional intent does not support the regulation in issue. Because the area appears to be in a state of confusion, I believe the proper course would be legislative correction. PARR and RUWE, JJ., agree with this concurring opinion.