Casey v. C.I.R., 85-2543

• Decision Date: 30 September 1987
• Docket Number: No. 85-2543,85-2543
• Citation: 830 F.2d 1092
• Parties: -5683, 87-2 USTC P 9537 William M. CASEY and Liou Dien-Mei Casey, Plaintiffs-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Defendant-Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1092

830 F.2d 1092

60 A.F.T.R.2d 87-5683, 87-2 USTC P 9537

William M. CASEY and Liou Dien-Mei Casey, Plaintiffs-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Defendant-Appellee.

No. 85-2543.

United States Court of Appeals Tenth Circuit.

Sept. 30, 1987.

Scott A. Taylor, Clinical Law Program, University of New Mexico, School of Law, Albuquerque, N.M., for plaintiffs-appellants.

James H. Love, Atty., Tax Div., Dept. of Justice, (Roger M. Olsen, Asst. Atty. Gen., Michael L. Paup and Jonathan S. Cohen, Attys., Tax Div., Dept. of Justice, with him on the brief), Washington, D.C., for defendant-appellee.

Before LOGAN and SETH, Circuit Judges, and BOHANON, District Judge. ^*

LOGAN, Circuit Judge.

William M. and Liou Dien-Mei Casey appeal from a decision of the United States Tax Court assessing a deficiency on their 1979 federal income tax return.

The only issue on appeal is whether the Caseys may deduct as "general sales taxes" under I.R.C. Sec. 164(a)(4), as it existed before 1986, ¹ amounts paid as New Mexico gross receipts taxes by the builder of a residence sold to them. The Caseys assert that they met the requirements of the statute and that Treas.Reg. Sec. 1.164-3(e)(1) (1964), which they do not satisfy, invalidly interprets the statute. Alternatively, they argue that, even if the regulation is valid, they satisfied both the statute and the regulations. The Tax Court held for the government on the ground that the Caseys had not met the "separately stated" requirement of Sec. 164(b)(5); ² it did not consider the other arguments. William M. Casey, 50 T.C.M. (CCH) 1014 (1985).

Because the essential facts are stipulated and many pending cases depend on the outcome of this litigation, we affirm the Tax Court judgment on a ground more generally applicable. The Treasury Department's interpretation in Treas.Reg. Sec. 1.164-3(e)(1) (1964) that the term "sales tax" means a tax imposed upon the sale of "tangible personal property" or upon the furnishing of "services" must be given effect. Since the Caseys here acquired realty and not tangible personal property, they are not entitled to the deduction.

New Mexico imposes a gross receipts tax on the sale of all services and property, N.M.Stat.Ann. Sec. 7-9-1 et seq. The tax does not apply to the sale of real property, but it does apply to receipts attributable to "improvements constructed on the real property by the seller in the ordinary course of his construction business...." Id. Sec. 7-9-53(A). Thus, when a newly built home and lot are sold, the home builder ³ must pay a gross receipts tax on the value of the new home but not on the value of the lot.

The Caseys agreed on March 16, 1979 to purchase a new townhouse and the underlying lot from the builder, Homes by Marilynn, Inc., for $35,250.00 plus settlement charges of $1837.93. ⁴ The Caseys and the builder never discussed who would pay the gross receipts tax. Months later, on February 2, 1980, the Caseys requested and received from the builder a letter which indicated that the sale price of the townhouse and lot included $1355.77 for the gross receipts tax. ⁵ The Caseys deducted this amount on their 1979 federal income tax returns under I.R.C. Sec. 164(a)(4) and (b)(5), as separately stated general sales taxes paid by a consumer to the seller.

I

The Caseys contend that the sales tax deduction, as plainly set forth in Sec. 164(a)(4) of the statute, is broad enough to allow them to deduct the gross receipts tax paid on the townhouse and lot. They challenge the validity of Treas.Reg. Sec. 1.164-3(e)(1) (1964), which limits the sales tax deduction to amounts paid on sales of tangible personal property and services. For the purposes of this argument, the Caseys concede that the townhouse and lot are realty and thus fall outside the regulation.

The Caseys' argument against the validity of the regulation is based upon Congress' changing the language of Sec. 164 in 1964. Under the 1954 Code, Sec. 164(c)(2)(A) explicitly limited federal deductibility of sales taxes to those levied on "tangible personal property." Congress omitted this explicit limitation in 1964, when it amended the section to read,

"[Sec. 164(a) ]

(a) GENERAL RULE.--[T]he following taxes shall be allowed as a deduction for the taxable year within which paid or accrued:

* * *

(4) State and local general sales taxes."

Pub.L. No. 88-272, Sec. 207(a), 78 Stat. 19, 40-41 (1964). Although Congress eliminated the explicit reference to tangible personal property, the Treasury Department's regulation, amended in 1964, continued to interpret the scope of the deduction as before:

"(e) Sales Tax. (1) The term "sales tax" means a tax imposed upon persons engaged in selling tangible personal property, or upon the consumers of such property...."

Treas.Reg. Sec. 1.164-3(e)(1) (1964). The regulation has not been amended since.

The standard of review for a Treasury regulation is highly deferential:

"This Court has many times declared that Treasury regulations must be sustained unless unreasonable and plainly inconsistent with the revenue statutes and that they constitute contemporaneous constructions by those charged with administration of these statutes which should not be overruled except for weighty reasons."

Commissioner v. South Texas Lumber Company, 333 U.S. 496, 501, 68 S.Ct. 695, 698, 92 L.Ed. 831 (1948) (citation omitted). The Caseys thus must demonstrate that the regulation is both unreasonable and plainly inconsistent with the statute. The issue reduces to a simple query: Did Congress in 1964 intend to broaden the benefits of the sales tax deduction?

What little light the legislative history of the 1964 amendment sheds almost entirely supports the notion that no change was intended. Both the House and Senate reports state that Congress desired to "continue" the sales tax deduction; this reasonably could be construed as an intent to maintain the deduction's historic boundaries. H.R.Rep. No. 749, 88th Cong., 2d Sess., reprinted in 1964 U.S.Code Cong. & Admin.News 1313, 1357; S.Rep. No. 830, id. at 1726, 1728. To the extent that the 1964 amendments contemplated any change in revenue, they anticipated an increase in revenues from the denial of deductibility of certain state and local taxes other than the sales tax deduction. H.R.Rep. No. 749, id. at 1358, 1361, S.Rep. No. 830, id. at 1727, 1729. Congress discussed no change in revenue from the sales tax deduction; from this we may infer that Congress intended no change in the scope of that deduction. The technical explanation of the tax bill refers to the sales tax as being on "tangible personal property." H.R.Rep. No. 749, id. at 1468; S.Rep. No. 830, id. at 1880 (referring to the House Report technical explanation).

The only evidence from which a contrary intent might be inferred comes from the reports stating that Congress intended to establish a neutral federal posture toward state property, income, and general sales taxes, so that states could choose freely among the three major revenue sources without federal tax law influencing the decision. H.R.Rep. No. 749, id. at 1357; S.Rep. No. 830, id. at 1726. Perhaps it could be argued that the regulation, which denies deductibility for some general sales taxes, creates a federal bias against sales taxes and thus is inconsistent with the statute. We do not accept such an inference as enough to yield a definitive congressional intent for change.

Additionally, we note that between 1964 and 1979, during which time the Treasury Department's regulation limited the tax deduction to sales of tangible personal property, Congress amended I.R.C. Sec. 164 several times without clarifying or changing subsection (a)(4). See Pub.L. No. 92-580, Sec. 4(a), 86 Stat. 1276, 1277 (1972) (adding a new subparagraph to subsection (b)(2)); Pub.L. No. 94-455, Sec. 1951(b)(3)(A) and (B), 90 Stat. 1520, 1837 (1976) (repealing old subsection (f) and adding a savings provision); Pub.L. No. 95-600, Sec. 111(a) and (b), 92 Stat. 2763, 2777 (1978) (repealing gasoline tax deduction).

When Congress is, or should be, aware of an interpretation of a statute by the agency charged with its administration, Congress' amendment or reenactment of the statutory scheme without overruling or clarifying the agency's interpretation is considered as approval of the agency interpretation. This rule has been applied in many tax cases. E.g., Paragon Jewel Coal Co. v. Commissioner, 380 U.S. 624, 636, 85 S.Ct. 1207, 1213, 14 L.Ed.2d 116 (1965); Helvering v. Winmill, 305 U.S. 79, 82-83, 59 S.Ct. 45, 46, 83 L.Ed. 52 (1938). The rule seems particularly appropriate when the interpretation is in a duly promulgated regulation, on an issue as noticeable and frequently applied as the deduction for general sales taxes. We therefore find the Treasury's interpretation to be consistent with Congress' intent. ⁶

II

The Caseys' second argument, which they raise somewhat indirectly, is that even if the Treasury regulation is valid, they meet the requirements of the regulation because what they purchased was, in effect, personalty. We reject this contention. We are satisfied that what the Caseys purchased in this case must be classified as real estate. ⁷ Federal law, as explicated in the regulation, allows the deduction of state taxes paid on personal but not real property. In such a situation, the federal law incorporates a particular state's definition of real and personal property. See Reconstruction Finance Corp. v. Beaver County, 328 U.S. 204, 209-10, 66 S.Ct. 992, 995, 90 L.Ed. 1172 (1946). Here, the builder sold a townhouse and lot to the Caseys. Under New Mexico law, the term "real estate ... shall be so construed as to be applicable to lands, tenements, and hereditaments...." N.M.Stat.Ann. Sec. 47-1-1 (1978). The lot clearly is realty, and the townhouse normally qualifies as a tenement.

Despite their admission that a townhouse is realty, the Caseys appear to suggest that the townhouse...