Court Opinion

ID: 4474254
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:10:51.3086+00
Date Added: 2024-06-11T12:23:18.436229
License: Public Domain

Swift, J., dissenting: Mainly for the reasons set forth in my prior concurring opinion in Redlark v. Commissioner, 106 T.C. 31, 48-49 (1996), revd. and remanded 141 F.3d 936 (9th Cir. 1998), I believe petitioners’ income tax deficiency interest should be regarded as properly allocable to petitioners’ business under section 163(h)(2)(A) and as deductible under section 163(a). None of the five Courts of Appeals’ opinions cited by the majority, nor the instant majority opinion, persuades me to the contrary. Within the jurisdictions of the seven other geographic Courts of Appeals, taxpayers still are entitled to rely on our Court-reviewed Redlark opinion, and that is exactly what Mr. and Mrs. Robinson have done. Lardas v. Commissioner, 99 T.C. 490, 495 (1992). Two separate but related facts in this case are clear and undisputed: (1) Under the express and clear language of section 163(h)(2)(A), if an interest expense is “properly alloca-ble” to a trade or business, the interest expense is deductible; and (2) the tax adjustments giving rise to petitioners’ 1987 tax deficiency arose directly from and in connection with petitioners’ law business. Accordingly, some portion of the related interest expense should be allocable to the business and should be deductible. Under respondent’s “temporary’ regulation, section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., 52 Fed. Reg. 48409 (Dec. 22, 1987), outstanding now for 15 years, petitioners’ interest expense is nondeductible regardless of the fact that it was incurred by petitioners in connection with the business. Respondent’s temporary regulation and position herein should be rejected as an erroneous attempt to redefine the substantive provision of section 163(h)(2)(A). Respondent’s temporary regulation may provide reasonable methods for allocating interest between a taxpayer’s business and a taxpayer’s other activities, but if there is no question as to what an item of interest expense relates to, then the statute is clear and requires an allocation between the business and the nonbusiness portions thereof, and the portion allocable to the taxpayer’s business is to be allowed as a deduction. Respondent’s temporary regulation, in a situation involving a sole proprietorship trade or business and a related income tax deficiency, improperly and contrary to the statute, establishes a per se interest expense disallowance rule and would leave no interest expense to be allocated. Respondent’s temporary regulation is also inconsistent with section 1.163-9T(b)(l)(i), Temporary Income Tax Regs., 52 Fed. Reg. 48409 (Dec. 22, 1987), and with the allocation rule provided in the sister regulation relating to situations where no loan proceeds are involved in an underlying transaction or activity (namely, where a seller or provider of goods or services provides financing to a taxpayer or where a transaction involves interest expense associated with a mere extension of credit, not a provision of funds). Section 1.163-8T(c)(3)(ii), Temporary Income Tax Regs., 52 Fed. Reg. 25001 (July 2, 1987), provides as follows: If a taxpayer incurs or assumes a debt in consideration for the sale or use of property, for services, or for any other purpose, or takes property subject to a debt, and no debt proceeds are disbursed to the taxpayer, the debt is treated for purposes of this section as if the taxpayer used an amount of the debt proceeds equal to the balance of the debt outstanding at such time to make an expenditure for such property, services, or other purpose. [Emphasis added.] The above temporary regulation provides that in the situations (and for any purpose) where financing and credit transactions do not involve the disbursement of loan proceeds but do involve the extension of credit, interest expense relating to the extension of credit is to be allocated between the taxpayer’s business and personal activity based on the nature of the underlying activity giving rise to the extension of credit. Under section 1.163-8T(c)(3)(ii), Temporary Income Tax Regs., supra, as applicable to the instant case, even though no loan proceeds were disbursed by the Government to petitioners, credit was extended by the Government to petitioners, and petitioners were charged interest with regard thereto. Because the underlying activity in question in this case (giving rise to the tax deficiency and to the Government’s extension of credit to petitioners) undisputedly relates to petitioners’ business, under section 1.163-8T(c)(3)(ii), Temporary Income Tax Regs., supra, some interest expense should be treated as properly allocable to petitioners’ business and as deductible under the statute. As suggested in Judge Vasquez’s dissenting opinion, in interpreting the statutory provisions in dispute herein, the occasional deference mandated by Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 842-843 (1984), to governmental agency interpretations of statutory language left ambiguous by Congress is not applicable. More recently, in United States v. Mead Corp., 533 U.S. 218 (2001), the Supreme Court addressed the general and flexible standard to be used by courts in evaluating what deference, if any, should be given to agency interpretative regulations and rulings as follows: The fair measure of deference to an agency administering its own statute has been understood to vary with circumstances, and courts have looked to the degree of the agency’s care, its consistency, formality, and relative expertness, and to the persuasiveness of the agency’s position ****** [M. at 228; in. refs, omitted.] And further: “The weight [accorded to an administrative] judgment in a particular case will depend upon the thoroughness evident in its consideration, the validity of its reasoning, its consistency with earlier and later pronouncements, and all those factors which give it power to persuade, if lacking power to control.” [Id. (quoting Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944)).] Consistent with the above statement quoting Skidmore, and before concluding whether the particular agency rulings involved therein (of the Environmental Protection Agency and of the U.S. Customs Service, respectively) were entitled to Chevron type deference, in both Chevron and Mead the Supreme Court reviewed the very “detailed and reasoned” historical aspects of the EPA ruling (Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., supra at 865), and the many “angles” of the classification ruling procedures of the U.S. Customs Service (United States v. Mead Corp., supra at 231).1  In the instant case, however, with regard to respondent’s promulgation of section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., 52 Fed. Reg. 48409 (Dec. 22, 1987), there is scant indication of respondent’s deliberations and degree of care exercised prior to promulgation of the temporary regulation. No history of the development of the temporary regulation is available. No hearing was held. No notice and comment were provided. No proposed regulation was made available. No history of respondent’s development of the policy position reflected in the temporary regulation is available. It appears to me that the statement in the 1987 Blue Book, discussed infra, and respondent’s failed litigating position in years prior to 1986 as to the deductibility of income tax deficiency interest relating to an individual’s trade or business (see cases cited infra note 7) are the only historical “angles” that would support the per se disallowance rule of section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., supra. That being the case, Chevron type deference is hardly appropriate. Of the Courts of Appeals that have addressed the issue before us, two inappropriately treat section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., supra, as a legislative regulation. See Redlark v. Commissioner, 141 F.3d 936, 940 (9th Cir. 1998); Miller v. United States, 65 F.3d 687, 690 (8th Cir. 1995). To the contrary, where it so intends, Congress knows how to specifically delegate legislative regulatory authority with regard to tax legislation, and nowhere in section 163(h) do we find such a delegation. For examples of such specific delegation of legislative authority within just the other subsections of section 163, see section 163(f)(2)(C) (involving interest expense on certain types of obligations that are not in registered form); section 163(i)(5) (involving interest expense on certain types of corporate debt instruments with substantial original issue discount); and section 163(1)(5) (involving interest expense on certain types of corporate indebtedness payable in the equity of the debtor). Although upholding it, the Court of Appeals for the Seventh Circuit noted its concern with regard to the deference to be given section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., supra, as follows: In the absence of any confirmation that the temporary regulation has, after the fact, undergone the scrutiny that typifies a pre-adoption notice and comment period, one could argue that section 1.163-9T(b)(2)(i)(A) is entitled to no more deference than a proposed regulation. * * * Whatever questions the "temporary” nature of this regulation might raise as to the degree of deference it is owed, the parties themselves have chosen not to pursue them. * * * [Kikalos v. Commissioner, 190 F.3d 791, 796 (7th Cir. 1999), revg. T.C. Memo. 1998-92.] With regard to the relevant legislative history relating to enactment in 1986 of subsection (h) of section 163, I submit that a reading thereof is available which has not yet been considered by the various courts addressing this issue and which: (1) Would support a plain-meaning interpretation of section 163(h)(2)(A) (allowing the deduction of individual income tax deficiency interest relating to a trade or business), and (2) which would not support respondent’s per se disallowance rule. In the Joint Statement of Managers of the Conference Report, H. Conf. Rept. 99-841 (Vol. II), at 11-154 (1986), 1986-3 C.B. (Vol. 4), 1, 154, published on September 18, 1986, the following statement is made: 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 * * * Personal interest also generally includes interest on tax deficiencies. [Emphasis added.] The emphasized language in the above quotation from the legislative history can be read to indicate that Congress in 1986 intended to carve out of the definition of personal interest all interest relating to a trade or business. Once all trade or business interest is carved out of personal interest by the above emphasized language, the next sentence generally describing personal interest reaches only types of interest left over, but not business interest that already is carved out by the prior language. With this reading of the legislative history, the last sentence in the above quotation (namely, “Personal interest also generally includes interest on tax deficiencies.”) may be read to reach only interest on tax deficiencies not related to a taxpayer’s trade or business. Of the approximately 15 law review and journal articles pre- and post-Redlark v. Commissioner, 106 T.C. 31 (1996), revd. and remanded 141 F.3d 936 (9th Cir. 1998), that comment substantively on the issue before us, seven support our original Redlark opinion on the statutory interpretation,2 and one supports it on policy grounds.3 Two articles agree with the Courts of Appeals’ reversals on the statutory interpretation.4 The balance of the articles comment on the issue and the controversy but appear to take no position one way or the other.5  One commentator stated: Temp. Reg. 1.163-9T(b)(2)(i)(A) should be invalidated if it is inconsistent with other statutes and regulations. It appears to be in conflict with Temp. Reg. 1.163 — 8T(c)(3)(ii), which was also enacted after the Blue Book explanation was published. This regulation controls when no loan proceeds are received as follows: If a taxpayer incurs or assumes a debt in consideration for the sale or use of property, for services, or for any other purposes, or takes property subject to a debt, and no debt proceeds are disbursed to the taxpayers, the debt is treated for purposes of this section as if the taxpayer used an amount of the debt proceeds equal to the balance of the debt outstanding at such time to make an expenditure for such property, services, or other purpose. “In the case of deficiency interest, the Government essentially extends credit to a taxpayer and assesses interest for the extension of that credit. Thus, when the underlying activity which creates the deficiency relates to a taxpayer’s business, the interest is 'allocable’ to the business and deductible under section 163(h)(2)(A).” [Quoting Allen v. United States, 987 F. Supp. 460, 466 (D.C.N.C. 1997), revd. 173 F.3d 533 (4th Cir. 1999).] Since Temp. Reg. 1.163-9T(b)(2)(i)(A) is in direct conflict with an earlier-enacted regulation that also covers the deductibility of deficiency interest related to a trade or business, Temp. Reg. 1.163 — 9T(b)(2)(i)(A) cannot be considered a reasonable interpretation of the statute. [Newmark & Englebrecht, “Courts Split on Individuals’ Deficiency Interest Deduction”, 62 Prac. Tax Strat. 87, 95 (1999); fn. ref. omitted.] With regard to the Blue Book to the 1986 Act, and its peculiar origin, we noted in our original opinion, Redlark v. Commissioner, 106 T.C. at 45 n.7, as follows: we also note that the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2085, was enacted on Oct. 22, 1986, during the 99th Congress, whereas the General Explanation [the Blue Book] was published on May 4, 1987, during the 100th Congress. Thus, the General Explanation is not even entitled to the respect it might otherwise be accorded if it had been prepared for the Congress which enacted sec. 163(h). See also Allen v. Commissioner, 118 T.C. 1, 14-15 (2002), involving the alternative minimum tax under section 55 and commenting on the limited usefulness of the Blue Book applicable to the 1986 Act. Further with regard to the Blue Book, see the concurring opinion herein of Judge Thornton. With regard to the legal context or climate which existed in 1986, at the time subsection (h) of section 163 was added to the Code, another commentator has stated: The problem with the dissent’s reasoning [in our Redlark opinion, 106 T.C. 31] is that, like the Eighth Circuit [in Miller v. United States, 65 F.3d 687, 689-690 (8th Cir. 1995)], it assumes that the statute is unclear. This assumption is based on the fact that section 163(h)(2)(A) defines personal interest by excluding business interest without providing a specific definition for business interest. The Eighth Circuit in Miller held that the absence of a definition of “business interest” created the ambiguity on which the IRS could hang its hat. As the Tax Court’s decision illustrates, however, Congress does not legislate in a vacuum. Under the prior case law, the interest on an income tax deficiency resulting from an adjustment involving a trade or business was treated as interest incurred in a trade or business. If Congress is deemed to have been aware of the law at the time it enacted Section 163(h)(2)(A), there was no ambiguity in the statutory language. [Lipton, “Divided Tax Court Allows Deduction of Interest on Tax Arising From a Trade or Business”, 84 J. Taxn. 218, 222 (1996).] Lastly, as I read it, the legislative history relating to the 1986 and the 1988 relevant legislative changes to section 163 shows that Congress, in disallowing personal interest, was addressing “consumer” interest, not interest that was specifically attributable to a taxpayer’s trade or business. In sum, section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., 52 Fed. Reg. 48409 (Dec. 22, 1987), is only interpretative. After 15 years, it is still in temporary form.6 Taking into account “all those factors” that bear upon its persuasiveness (see the above quotation from United States v. Mead Corp., 533 U.S. at 228), namely— (1) The unambiguous statutory language of section 163(h)(2)(A) under which all interest expense properly alloca-ble to a trade or business is deductible; (2) the relevant legislative history; (3) the caselaw existing at the time section 163(h) was enacted in 1986 that allowed a deduction for income tax deficiency interest relating to a taxpayer’s business;7  (4) the language of section 1.163-9T(b)(l)(i) Temporary Income Tax Regs., supra, and the language of section 1.163-8T(c)(3)(ii), Temporary Income Tax Regs., supra,8 both of which would support an allocation and the deduction of an individual taxpayer’s trade or business related income tax deficiency interest; and (5) the lack of any indication that Treasury or the Commissioner, prior to promulgation of section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., supra, under which a per se disallowance rule was adopted affecting thousands of individual taxpayers,9 gave any significant policy consideration to the question of statutory interpretation at issue herein, section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., supra, is entitled to little, if any, deference. It is not persuasive, and it should be rejected. Respectfully, in my opinion, petitioners’ business-related income tax deficiency interest should be deductible. Wells, Colvin, Laro, and Vasquez, JJ., agree with this dissenting opinion.  See Chevron U.S A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 853-859 (1984); United States v. Mead Corp., 533 U.S. 218, 231-234 (2001).    Eller, “Interest Deduction for Noncorporate Tax Deficiencies”, 56 Taxn. for Acct. 209, 211 (1996); Lipton, “Redlark Reversed but Interest Deductions for Business Tax Deficiencies is Still an Open Issue”, 89 J. Taxn. 24, 28 (1998); Lipton, “Divided Tax Court Allows Deduction of Interest on Tax Arising From a Trade or Business”, 84 J. Taxn. 218, 222 (1996); Newmark & Englebrecht, “Courts Split on Individuals’ Deficiency Interest Deduction”, 62 Prac. Tax Strat. 87, 95 (1999); Raby & Raby, “Allocating Individual Tax Deficiency Interest”, 70 Tax Notes 573, 575 (1996); Andreozzi, Comment, “Prohibiting the Deduction for Noncorporate Tax Deficiency Interest: When Treasury Goes Too Far”, 34 J. Marshall L. Rev. 557, 579-581 (2001); Reynolds, Comment, “Redlark v. Commissioner: A ‘Bird in the Hand’ for Noncorporate Taxpayers?”, 47 Case W. Res. L. Rev. 751, 795 (1997).    Engel, “Deducting Interest on Federal Income Tax Underpayments: A Roadmap Through a 50-Year Quagmire”, 16 Va. Tax Rev. 237, 296-297 (1996).    Harllee, 536-2nd Tax Mgmt. (BNA), “Interest Expense Deductions”, at A-113 (1998); Popkin, “The Taxpayers’ Third Personality: Comments on Redlark v. Commissioner”, 72 Ind. L.J. 41, 61 (1996).    7 Mertens, Law of Federal Income Taxation, sec. 26:35, at 93 (2001); Banoff et al., “After Allen, Is There Substantial Authority for Deducting Interest on Tax Deficiencies?”, 90 J. Taxn. 377 (1999); Banoff et al., “Two More Courts Reject Redlark — Interest on Taxes Not Deductible”, 91 J. Taxn. 255 (1999); Raby, “Deducting Interest on a Form 1040 Deficiency”, 67 Tax Notes 945, 946 (1995); “Interest on Taxes Never Deductible, Ninth Circuit Says — Redlark Reversed”, 88 J. Taxn. 260 (1998).    Since Nov. 20, 1988, temporary regulations promulgated thereafter automatically expire after 3 years. Sec. 7805(e).    See Reise v. Commissioner, 35 T.C. 571 (1961), affd. 299 F.2d 380 (7th Cir. 1962); Polk v. Commissioner, 31 T.C. 412 (1958), affd. 276 F.2d 601 (10th Cir. 1960); Standing v. Commissioner, 28 T.C. 789 (1957), affd. 259 F.2d 450 (4th Cir. 1958).    Note that sec. 1.163-8T(c)(3)(ii), Temporary Income Tax Regs., was promulgated on July 2, 1987, 52 Fed. Reg. 25001 (July 2, 1987), prior to promulgation on Dec. 22, 1987 of sec. 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., 52 Fed. Reg. 48409 (Dec. 22, 1987).    See the dissenting opinion of Chief Judge Wells.