Beyer v. Comm'r of Internal Revenue
| Decision Date | 21 June 1989 |
| Docket Number | Docket No. 13810-87. |
| Citation | 92 T.C. No. 87,92 T.C. 1304 |
| Parties | ARTHUR BEYER and CATHERINE A. BEYER, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Petitioners carried over investment interest expense, paid in 1981, not allowable as a deduction in that year by reason of the limitation contained in sec. 163(d), I.R.C., but not in excess of taxable income for 1981, to 1982. They then carried over to 1983 the aforesaid 1981 excess investment interest expense and the excess investment interest expense paid in 1982 which was not allowable as a deduction in that year by reason of the limitation contained in sec. 163(d). The amount carried over was in excess of petitioners' taxable income for 1982. HELD, that the 1982 investment interest expense disallowed under sec. 163(d) can be carried over to 1983 only to the extent that it does not exceed petitioners' taxable income for 1982. HELD, FURTHER, that the 1981 investment interest expense disallowed under sec. 163(d) can be carried over to 1983. Moe D. Karash for the petitioners.
Monica E. Koch for the respondent.
Respondent determined deficiencies in petitioners' Federal income tax for the taxable year 1983 in the amount of $38,308 and in the amount of $264 for the taxable year 1984 and an addition to tax under section 6661 1 in the amount of $9,577 for the taxable year 1983. Respondent having conceded the addition to tax and petitioners having conceded respondent's determination for 1984, the issues for decision are: (1) whether petitioners are entitled to a carryover of the amount of investment interest expense for 1981 and 1982 disallowed by reason of the limitations in section 163(d) to 1983 to the extent that said amounts exceeded their taxable income for 1982; (2) whether, in the alternative, (a) petitioners may add the disallowed investment interest expense to their basis in securities, or (b) whether petitioners were in the trade or business of trading securities during the year in issue so that section 163(d) is inapplicable.
This case has been submitted under Rule 122. The stipulation of facts and the attached exhibits are incorporated herein by reference.
Petitioners resided in Rixeyville, Virginia, at the time of the filing of their petition. Petitioners filed Federal income tax returns for taxable years 1982, 1983, and 1984 with the Internal Revenue Service, Memphis, Tennessee.
Petitioners reported total investment interest expense of $177,603, consisting of a carryover of $151,849 from 1981 and a current amount of $25,754 for 1982, on Form 4952, Investment Interest Expense Deduction, attached to their 1982 Federal income tax return. In making the computations, petitioners determined that investment interest expense deductible in 1982 was limited to $14,748. Petitioners reported taxable income of $8,095 for 1982. Petitioners carried the disallowed investment interest expense of $162,855 from 1982 ($177,603 minus $14,748) forward to Form 4952 attached to their 1983 Federal income tax return.
In 1983, petitioners had additional investment interest expense of $71,662. Petitioners reported this investment expense and the carryover from 1982, totalling $234,517, on Form 4952 attached to their 1983 Federal income tax return. Petitioners determined that the limitation to the amount of investment interest expense deductible in 1983 was $236,600. Petitioners therefore deducted the total investment interest expense of $234,517 on their 1983 Federal income tax return.
Respondent determined that $154,760 of the 1982 carryover of disallowed investment interest should not be carried over to 1983 to the extent that the total carryover from 1982 ($162,855) exceeded petitioners' taxable income for 1982 ($8,095).
This is a case of first impression. The issue is the extent to which the carryover of disallowed investment interest expense under section 163(d) is subject to a taxable income limitation. Respondent argues that, for 1983, petitioners' carryover of investment interest expense from both 1981 and 1982 disallowed by reason of the limitation set forth in section 163(d)(1) is limited to the amount of petitioners' taxable income for 1982. Petitioners assert that the carryover of disallowed investment interest expense for 1981 and 1982 is not so limited and that the full amount of $162,855 is available for that purpose.
Section 163(d) provides: 2
(1) In general. -- In the case of a taxpayer other than a corporation, the amount of investment interest (as defined in paragraph (3)(D)) otherwise allowable as a deduction under this chapter shall be limited, in the following order, to --
(A) $10,000 ($5,000, in the case of a separate return by a married individual), plus
(B) the amount of the net investment income (as defined in paragraph (3)(A)), plus the amount (if any) by which the deductions allowable under this section (determined without regard to this subsection) and sections 162, 164(a)(1) or (2), or 212 attributable to property of the taxpayer subject to a net lease exceeds the rental income produced by such property for the taxable year.
* * *
(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.
but only to the extent such income, gain, and amounts are not derived from the conduct of a trade or business.
* * *
(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).
We first address petitioners' alternative argument that the limitations of section 163(d) are inapplicable because Mr. Beyer was in the trade or business of trading securities. Petitioners bear the burden of proof on this issue. Rule 142(a); Welch v. Helvering, 290 U.S. 111 (1933). We hold that they have not carried their burden.
Petitioners offered no evidence that Mr. Beyer incurred the investment interest expense for purchases other than as an investor. No matter how extensive his activities may be, an investor is never considered to be in the trade or business with respect to his investment activities. King v. Commissioner, 89 T.C. 445, 459 (1987). 3 We turn to the question of the extent to which the limitations of section 163(d) should apply in determining petitioners' deductible investment interest expense for 1983.
The limitation on the deductibility of investment interest expense was first enacted as section 221 of the Tax Reform Act of 1969, Pub. L. 91-172, 83 Stat. 487, 574. Prior to the passage of this section, a taxpayer could incur large investment interest expense which could be used to offset income other than investment income. However, if the taxpayer did not have sufficient taxable income to absorb the entire amount of the investment interest expense, there was no carryover of the excess investment interest expense to succeeding taxable years. The legislative history reflects that the limitations contained in section 163(d) were first proposed in the House of Representatives' version of the Tax Reform Act of 1969, H.R. 13270, sec. 221, 91st Cong., let Sess. (1969), and were aimed at curbing the use of investment interest expense in excess of investment income to insulate other income from taxation, the effect of which was to produce a mismatching of investment income and investment expense. H. Rept. 91-413 (Part 1) (1969), 1969-3 C.B. 200, 245. The House Report also indicates that disallowed investment interest expense could be carried over to subsequent years but that the section was not intended to allow the amount that would not otherwise be deductible because of insufficient taxable income to be carried over to succeeding taxable years. Thus, the House Report provides:
Interest for which a deduction was disallowed in a year, because of the application of the limitation, could be carried over to subsequent years and used to offset net investment income (including capital gains) arising in those years to the extent allowable under the limitation in such a year. A carryover would not be available, however, for disallowed interest to the extent it exceeded the taxpayer's taxable income for the year (that is, to the extent the disallowed interest would not have reduced the taxpayer's taxable income). [H. Rept. 91-413 (Part 1), supra, 1969-3 C.B. at 246.]
The Senate version of the Tax Reform Act of 1969 did not contain any provision limiting the deductibility of investment interest expense. The Conference Report followed the House provision, with certain modifications not relevant herein. That Report states, ‘A carryover of disallowed interest is allowed so that the disallowed interest can be used to offset investment income (and capital gains) in subsequent years.‘ It makes no reference to the impact of the amount of taxable income in any year to the availability of a carryover. H. Rept. 91-782 (Conf.) (1969), 1969-3 C.B. 644, 657. However, limiting language identical to that of the House Report in this respect is contained in the General Explanation of the Tax Reform Act of 1969 prepared by the Staff of the Joint Committee on Taxation, at p. 100 (Jt. Comm. Print 1970). 4
Section 163(d) was amended by the Tax Reform Act of 1976, Pub. L. 94-455, sec. 209, 90 Stat. 1520, 1542. The House Report to this Act contains a discussion of the limitation on the carryover similar to that contained in the House Report on the Tax...
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