Court Opinion

ID: 9476793
Source: CourtListenerOpinion
Date Created: 2023-08-05 06:05:37.468256+00
Date Added: 2024-06-11T17:45:30.874411
License: Public Domain

SETH, Circuit Judge,
dissenting:
I must respectfully dissent from the position and explanation of the majority.
*1097The IRS sought to disallow a deduction by taxpayers of New Mexico gross receipts tax paid on the purchase of a new house in 1979. The Tax Court disallowed the deduction for a failure to meet a “separately stated” requirement. The Commissioner asserts also that the disallowance was proper under Reg. § 1.164-3 which essentially defines a "sales tax” for which a deduction is permitted to be a tax on tangible personal property and services. The majority considers only the regulation point. This Regulation was issued after Congress had changed the applicable portion of the Act in 1964, as hereinafter described (Pub.L. No. 88-272), and before New Mexico changed from a sales tax to a gross receipts tax. Revenue Ruling 82-173, interpreting the Regulation, sought belatedly to apply the narrow definition for the first time and to disallow deductions of the state tax imposed on the sale of new homes in New Mexico on the ground that the tax was not on “tangible personal property.”
This litigation centers on the 1964 change made by Congress in the section of the statute relating to deductions for state “sales taxes” (1954 Code § 164(c)(2)(A)) to omit the express limitation on deductibility of sales taxes to taxes on “tangible personal property” and to substitute the term “general sales taxes” for “sales taxes.” There was thus substituted by Pub.L. No. 88-272 as a permissible deduction: “State and local general sales taxes.” “General sales taxes” were defined in the statute. No reference to “tangible personal property” was carried forward in the statute or definitions and the new term “general sales taxes" replaced the term "sales tax.” However, the Treasury Regulation here concerned reinserted the eliminated “tangible personal property” limitation by way of an interpretative regulation (Reg. § 1.164-3(e)(l)), defined the old term "sales tax” which no longer appeared in the statute and thereby sought to narrow the statutory provision.
The new statutory provision, as mentioned, contained a definition of “general sales tax” which would seem to have been sufficient without any interpretation. This definition in the Act was thus substituted for the prior mere “sales tax” and for its reference to “tangible personal property.” The statutory definition of a “general sales tax,” as a new term, appeared as I.R.C. § 164(b)(2)(A):
“The term ‘general sales tax’ means a tax imposed at one rate in respect to the sale at retail of a broad range of classes of items.”
This broad and general definition was in response to the great variations among state sales taxes, general sales taxes and gross receipts taxes mentioned above. The intent to cover most all possible transactions is apparent from the language.
In contrast, Treasury Regulations carried forward the old definition of “sales tax” (not “general”) to limit it to sales of tangible personal property. The Regulation defines a “sales tax” as a tax on sales of tangible personal property and then defines “general sales tax” as a “sales tax” imposed at one rate on a variety of classes of items. It thereby inserts the “tangible personal property” requirement and equates “general sales taxes” with “sales taxes,” a term no longer in the statute. The Commission thus asserts in this action that the house sale was under its definition not of tangible personal property and disallowed the deduction.
In the House Report on the statutory change, it appears in the tabulations that it was intended to include gross receipts taxes as “general sales taxes.” (H.R.Rep. No. 749, 88th Cong. 1st Sess. 48.) There are really no explanations in the committee reports as to the reason for the change in terminology. It would appear none were needed. The term itself with the definition was clear and sufficient. It was broader than the previous bare “sales tax” and inconsistent therewith. Thus there may not have been reasons expressed for the change, but a substantial change was made. The wording and definitions are much different. Why would the provisions have been changed if no change in consequences was intended but the statute was amended?
*1098As mentioned, the Regulation was adopted in 1964. The section of the statute to which it related was amended by Congress several times after the Regulation became effective to add or repeal particular subsections as to unrelated matters. There appears to be no reenactment of the section. However, the actual impact of the Regulation and its purported meaning, insofar as the issue is presented by this case, was not revealed until two subsequent events took place. The first was the change in the New Mexico statute from a typical sales tax to the gross receipts tax in 1966, and secondly, and of more significance, was the issuance of Revenue Ruling 82-173 which in 1982 actually applied, and for the first time, the narrow interpretation of the Regulation to new house sales in New Mexico. Before the Ruling the IRS practice was to allow as a sales tax deduction, under the Regulation, the New Mexico gross receipts tax on new houses. There was thus before then a frequently applied deduction contrary to the Revenue Ruling. The issue in this case was thus new as there was before no “long-standing” interpretation except to the contrary.
The issue in this appeal arose not with the issuance of Regulation § 1.164-3 in 1964, as it brought about no change in the deductibility of the New Mexico gross receipts tax. Instead it was the official interpretation of the Regulation by Revenue Ruling 82-173 coming years later which sought to read out the statutory definition of “general sales tax” in the statute.
There is no apparent reason why, in the Regulations, Treasury reinserted the previous tangible personal property limitations removed by Congress. The fact of this obvious substitution is in itself reason to invalidate the interpretive Regulations. Treasury used its general authority to issue the interpretive regulation, I.R.C. § 7805(a), as there was no specific authority to interpret in the statute concerned in the legislation. Thus we must examine the interpretation under United States v. Vogel Fertilizer Co., 455 U.S. 16, 24, 102 S.Ct. 821, 827, 70 L.Ed.2d 792:
“The framework for analysis is refined by consideration of the source of the authority to promulgate the regulation at issue. The Commissioner has promulgated Treas.Reg. § 1.1563-l(a)(3) interpreting the statute only under his general authority to ‘prescribe all needful rules and regulations.’ 26 U.S.C. § 7805(a). Accordingly, ‘we owe the interpretation less deference than a regulation issued under a specific grant of authority to define a statutory term or prescribe a method of executing a statutory provision.’ ”
See also Rowan Cos. v. United States, 452 U.S. 247, 101 S.Ct. 2288, 68 L.Ed.2d 814, and Estate of Boeshore v. Commissioner, 78 T.C. 523.
Under the prevailing standard of review, the interpretative regulation is valid only to the extent it “harmonizes with the plain language of the statute, its origin, and its purpose.” National Muffler Dealers Ass’n v. United States, 440 U.S. 472, 99 S.Ct. 1304, 59 L.Ed.2d 519. This the Regulation under consideration does not do. See General Motors Corp. v. United States, 283 F.2d 699, 151 Ct.Cl. 366, where language from a superseded statute was sought to be included by a Regulation.
Under these circumstances Treasury Regulation § 1.164-3 and the Revenue Ruling cannot be valid as an attempted redefinition of the statutory term “general sales tax” to limit deductions to sales of tangible personal property, and to so prevent the deduction of the state’s gross receipts tax on new home sales.
In the circumstances of this case the New Mexico gross receipts tax is imposed on the part of the receipts from the sale of the new house attributable to improvements constructed by the seller on real property in the course of his business. N.M.Stat.Ann. § 7-9-53(A). Thus the value used is that of the completed structure so constructed. The materials and labor were combined and obviously have become part of the real estate under traditional real property doctrines.
The statutory application of the New Mexico gross receipts tax thus ignores the property law doctrines in placing the tax on *1099the sale and on the value of the bundle of materials and services which had become the house. This is done regardless of the value or character of the added individual items of property or services initially or at the time of sale. There appears to be no reason why the legislature could not so define the subject of the tax and ignore the property law aspects.
The state statutory provision for the use of non-taxable transactions certificates as was done here demonstrates this conclusion. Thus the contractor using such certificates in the purchase of materials is to collect and report the tax on the sale of the constructed project. N.M.Stat.Ann. § 7-9-51(B)(l) and (2), § 7-9-52(B)(l). This provision thus permits a planned delay in the payment of the tax until the house is sold and to shift the incidence of the tax to the buyer of the house. The seller collects the tax from the buyer on the sale. It further uses an entirely different basis for the assessment of the tax, as mentioned above, and places it on a transaction and sale of an entirely different item of property.
The gross receipts tax was here imposed on the completed building without any need for characterization as to real or personal property, and without regard to real property law. The subject the incidence is clearly designated. The incidence of a tax such as this is ordinarily determined by local law. Petty v. Commissioner, 77 T.C. 482.
The New Mexico tax was accepted by the IRS as a “general sales tax” under I.R.C. § 164(a)(4) which related to deductions. Rev.Rul. 82-173, 1982-42 I.R.B. 5. In my view, it was well within the statutory definition of a “general sales tax” contained in the changes made by Congress in 1964, above described. Here applied it was a tax imposed at one rate in respect to the sale at retail "of a broad range of classes of items.”
The state tax here concerned was thus deductible under the statute.