Beyer v. C.I.R., 89-2843
| Decision Date | 15 October 1990 |
| Docket Number | No. 89-2843,89-2843 |
| Citation | 916 F.2d 153 |
| Parties | -5698, 59 USLW 2256, 90-2 USTC P 50,536 Arthur BEYER; Catherine A. Beyer, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. |
| Court | U.S. Court of Appeals — Fourth Circuit |
Charles W. Hall, Fulbright & Jaworski, Houston, Tex., argued (Steven E. Segal, John R. Allender, Mary Frances Lapidus, Fulbright & Jaworski, Houston, Tex., Moe K. Karash, Forest Hills, N.Y., Keith A. Jones, Washington, D.C., on the brief), for petitioners-appellants.
Teresa Thomas Milton, Tax Div., U.S. Dept. of Justice, Washington, D.C., argued (Shirley D. Peterson, Asst. Atty. Gen., Gary R. Allen, Gilbert S. Rothenberg, Tax Div., U.S. Dept. of Justice, Washington, D.C., on the brief), for respondent-appellee.
Before WIDENER, Circuit Judge, McMILLAN, Senior District Judge for the Western District of North Carolina, sitting by designation, and YOUNG, Senior District Judge for the District of Maryland, sitting by designation.
This appeal presents an issue of first impression in this court concerning the carry-over provision of Sec. 163(d)(2) of the Internal Revenue Code (IRC). The Tax Court held that the carry-over is subject to an implicit limitation equal to the taxpayer's total taxable income for the year in which the expense was incurred. After reviewing the language of the statute and the legislative history behind the carry-over provision, we conclude the Congress intended no such limitation and reverse the judgment below.
In 1981, Arthur and Catherine Beyer, the taxpayers in this case, incurred substantial investment interest expense as defined by IRC Sec. 163(d)(3)(D). Under IRC Sec. 163(d)(1), the Beyers were able to claim a deduction for such investment interest, but for no more than the sum of $10,000 plus their net investment income for the current year. Interest expense above that amount was disallowed. Because of this limitation, taxpayers were not allowed to claim $151,849 in interest expenses as a current deduction for 1981. However, IRC Sec. 163(d)(2), the provision at issue here, provided that "[t]he amount of disallowed investment interest for any taxable year shall be treated as investment interest paid or accrued in the succeeding taxable year." Pursuant to this section, taxpayers carried over the $151,849 in investment interest to 1982.
In 1982, taxpayers' investment interest expense again exceeded the limitation on deductions for the current year (by $11,006), preventing the use of the deduction carried over from the previous year. Taxpayers carried over the total interest expense disallowed in 1981 and 1982 ($162,855) and claimed it as a current deduction in 1983 when they had a surplus of net investment income.
In reviewing taxpayers' returns, the Commissioner of the Internal Revenue Service took the position that taxpayers could carry over disallowed investment interest expense only to the extent that the expense did not exceed the taxpayers' total taxable income for the year in which the expense was incurred. The Beyers' taxable income in 1982 was only $8,095, limiting their carry-over to 1983 to that amount. The taxpayers petitioned for review in the United States Tax Court.
The Tax Court agreed with the Commissioner that the investment interest carry-over was limited to the taxpayers' taxable income in the year in which the expense was incurred. The court held, however, that the taxable income limitation on the carry-over did not apply in subsequent years. Under this view, the taxpayers could indefinitely carry over their disallowed interest expense from 1981 of $151,849, regardless of their total taxable income in subsequent years, because they had more than $151,849 in total taxable income in 1981. The Tax Court thus allowed taxpayers to carry over their entire disallowed interest expense from 1981 to 1983, but limited their carry-over from 1982 to the 1982 total taxable income of $8,095.
As with any question of statutory construction, we turn first to the language of the statute. Landreth Timber Co. v. Landreth, 471 U.S. 681, 685, 105 S.Ct. 2297, 2301, 85 L.Ed.2d 692 (1985). During the tax years at issue, Sec. 163(d) of the Code read, in pertinent part, as follows:
(d) Limitation on interest on investment indebtedness--
(1) In general.--[T]he amount of investment interest ... otherwise allowable as a deduction under this chapter shall be limited, in the following order, to--
(A) $10,000 ..., plus
(B) the amount of the net investment income....
(2) Carryover of disallowed investment interest.--The amount of disallowed investment interest for any taxable year shall be treated as investment interest paid or accrued in the succeeding taxable year.
(3) Definitions.--For the purposes of this subsection ...
* * * * * *
(E) Disallowed investment interest.--The term "disallowed investment interest" means with respect to any taxable year, the amount not allowable as a deduction solely by reason of the limitation in paragraph (1). 1
The carry-over provision allows taxpayers to preserve investment interest deductions that would have been "allowable" except for the requirement that the deductions be matched to investment income. It does not create new deductions. If another provision in the Code bars a deduction, such as the prohibition in IRC Sec. 265 against deducting investment interest expense incurred to purchase tax-free obligations, then such interest may not be carried over under Sec. 163(d)(2). The investment interest expense incurred by the Beyers was clearly not allowable under IRC Sec. 163(d)(1). The question presented in this appeal is whether it was "otherwise allowable" because Sec. 163(d)(1) was the "sole" basis for excluding the deduction.
The Commissioner admits that no express language in the Code provides any independent limitation on the interest expense deductions claimed by the Beyers. Rather, the Commissioner argues that there is an inherent limitation built into the tax system itself because a taxpayer may not claim more deductions in a given year than taxable income (a negative net income still equates to a tax of zero dollars). The Commissioner points out that prior to 1969, when the carry-over provision was originally passed, taxpayers could deduct investment interest expense against all taxable income, but any interest expense above that amount was forever lost as a deduction (because there was no carry-over). Allowing taxpayers to carry over interest expense in excess of total taxable income would, the Commissioner argues, create a new deduction not intended by the Congress.
Taxpayers argue that nothing in the statute limits the carry-over to total taxable income and that the courts should not create such a limitation without some manifestation of Congressional intent. Taxpayers acknowledge that, prior to the enactment of the carry-over provision, a taxpayer could not claim deductions for investment interest in excess of total taxable income. The inability to claim a deduction, however, does not necessarily mean that the deduction is not "allowable."
In other contexts, the Code distinguishes between "allowable" deductions, those available to a taxpayer whether or not they are actually claimed on a tax return, and "allowed" deductions, those actually claimed by the taxpayer on a particular return. For example, IRC Sec. 1016(a)(2) requires an adjustment to basis in property for the amount "allowed" as deductions on a tax return, "but not less than the amount allowable" whether or not the allowable amount was claimed on a return. (Emphasis added.) 2
The carry-over provision in Sec. 163(d) defines "disallowed investment interest" as any amount not "allowable" as a deduction "solely" because of the limitation concerning investment income. Except for the investment income limitation in IRC Sec. 163(d), all of the investment interest expense incurred by the Beyers was "allowable" as a deduction under the above definitions. While some of those interest deductions may not have been "allowed" because they exceeded taxable income, they were nonetheless "allowable."
This interpretation of the statute is consistent with the basic purpose of the investment interest deduction limitation and carry-over provisions. Tying the interest deductions to investment income prevents taxpayers from using the investment interest expense deduction as a tax shelter for non-investment income and encourages them to invest only in projects that will yield a profit aside from the tax benefits. Allowing taxpayers to carry over all unclaimed interest expense to future years allows them to match expenses with investment income that may not be realized for several years. By contrast, the limitation urged by the Commissioner, based on earned income, arbitrarily prevents taxpayers with little earned income from reaping the benefit of the deduction for ventures profitable in the long run, but with a low initial payoff. 3 While individuals may ultimately claim more deductions than would have been available prior to the enactment of the investment income limitation and carry-over provisions, they will only be able to do so if their investments...
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