Nalle v. Comm'r of Internal Revenue
| Decision Date | 05 August 1992 |
| Docket Number | 22047–89.1,Nos. 22026–89,s. 22026–89 |
| Citation | 99 T.C. 187,99 T.C. No. 9 |
| Parties | George S. NALLE, III, and Carole Nalle, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.Charles A. BETTS and Sylvia I. Betts, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Charles L. Eppright, for petitioners.
William R. Leighton, for respondent.
Respondent determined deficiencies in the Federal income tax liability of George S. Nalle, III, and Carole Nalle (petitioners) as follows:
+----------------+
¦Year¦Deficiency ¦
+----+-----------¦
¦1980¦$ 6,163.32 ¦
+----+-----------¦
¦1983¦2,638.75 ¦
+----+-----------¦
¦1984¦14,012.54 ¦
+----+-----------¦
¦1985¦260,804.61 ¦
+----------------+
Respondent determined deficiencies in the Federal income tax liability of Charles A. Betts and Sylvia I. Betts (petitioners) as follows:
+-----------------+
¦Year¦Deficiency ¦
+----+------------¦
¦1980¦$ 14,322.00 ¦
+----+------------¦
¦1983¦21,184.00 ¦
+-----------------+
The sole issue for decision is whether section 1.48–12(b)(5), Income Tax Regs., is valid.2 Section 1.48–12(b)(5), Income Tax Regs., generally provides that the investment tax credit for rehabilitation expenditures is not available where the building or structure is relocated prior to its rehabilitation. (Unless otherwise indicated, section references are to the Internal Revenue Code as in effect for the years in issue.)
Some of the facts have been stipulated. The stipulation of facts and attached exhibits are incorporated herein by this reference. All of the petitioners were residing in Austin, Texas, at the time of the filing of their petitions.
George S. Nalle, III, was a partner in a joint venture known as Heritage Square Joint Venture (Heritage). In 1982, Heritage purchased two buildings, the Julia Harris House and the Kluge House. Heritage had both houses transported from their original locations in Austin, Texas, to an historic office subdivision (Heritage Square) located in Rollingwood, Texas (a suburb of Austin), where they were rehabilitated. The Julia Harris House was later sold to petitioners Charles and Sylvia Betts.
In 1983 and 1984, Nalle, acting in his individual capacity, purchased six buildings: The Bohls House, the Dimmitt House, the Anderson House, the Johnson House, the Mabry House, and the Commissioner's House. As before, these buildings were transported to Heritage Square where they were rehabilitated. The Dimmitt House, the Mabry House, and the Commissioner's House were originally located in Austin, Texas. The Bohls House, the Anderson House, and the Johnson House were originally located in Taylor, Texas, New Sweden, Texas, and Circleville, Texas, respectively. All of the buildings in question were over 40 years old on the date rehabilitation work started.
Heritage did not claim an investment tax credit for the rehabilitation expenses incurred with respect to the Julia Harris House. Heritage elected to pass any and all investment tax credit attributable to the Julia Harris House on to the purchasers, petitioners Charles and Sylvia Betts. In this regard, the Betts reported an investment tax credit for rehabilitation expenditures in the amount of $35,934 on their joint 1983 Federal income tax return. Of that amount, $14,322 was carried back to reduce their income tax for the 1980 taxable year.
Petitioners George and Carole Nalle reported investment tax credits for rehabilitation expenditures as follows:
+-------------+
¦Year¦Amount ¦
+----+--------¦
¦1983¦$14,078 ¦
+----+--------¦
¦1984¦120,661 ¦
+----+--------¦
¦1985¦274,200 ¦
+----+--------¦
¦1986¦94,269 ¦
+-------------+
As of June 28, 1985 (the date of publication of section 1.48–12, Proposed Income Tax Regs., 50 Fed.Reg. 26794 (June 28, 1985)): (1) Heritage had rehabilitated the Julia Harris House and sold it to Charles and Sylvia Betts; (2) Heritage had completed the rehabilitation of the Kluge House; and (3) Nalle had incurred a substantial portion of the rehabilitation expenditures attributable to each of the six houses he purchased in his individual capacity.
OPINIONRespondent disallowed the investment tax credits claimed by petitioners on the ground that none of the rehabilitated buildings satisfies the definition of a “qualified rehabilitated building” as set forth in section 48(g)(1)(A) and section 1.48–12(b)(5), Income Tax Regs. The operative provision is section 48(g)(1)(A)(iii) which requires that 75 percent or more of the existing external walls must be “retained in place” as external walls in the rehabilitation process. Section 1.48–12(b)(5), Income Tax Regs., provides in pertinent part: Location at which the rehabilitation occurs.
[A] building, other than a certified historic structure, is not a qualified rehabilitated building unless it has been located where it is rehabilitated for the * * * forty-year period immediately preceding the date physical work on the rehabilitation began in the case of a “40–year building.” * * *
It is respondent's position that, although petitioners “retained” 75 percent of the existing exterior walls in the rehabilitation process, the walls were not “retained in place” in that all of the buildings were moved from their original locations prior to being rehabilitated. In particular, respondent asserts that:
The phrase “in place” must be a limitation on the location of the rehabilitated building. “Retained” and “retained in place” must have different meanings. * * * [E]ither the words “in place” provide a restriction on location, or they are superfluous. * * *
Petitioners counter that each of the rehabilitated buildings satisfies the definition of a “qualified rehabilitated building” as set forth in section 48(g)(1)(A). Petitioners maintain that the phrase “retained in place” merely requires that 75 percent of the existing external walls be retained as external walls in the rehabilitation process, and nothing more. Petitioners further contend that section 1.48–12(b)(5), Income Tax Regs., is invalid on the ground that there is no support in the statute for respondent's imposition of a restriction on the relocation of qualified rehabilitated buildings.
We note at the outset that the Secretary does not enjoy a specific grant of authority to promulgate regulations under section 48. Accordingly, the regulation in question is an interpretative regulation promulgated by the Secretary pursuant to the general grant of authority provided in section 7805(a). Interpretative regulations, although entitled to respect, are entitled to less judicial deference than that given to legislative regulations promulgated pursuant to a specific grant of authority. See United States v. Vogel Fertilizer Co., 455 U.S. 16, 24 (1982); Phillips Petroleum v. Commissioner, 97 T.C. 30, 34 (1991).
In Durbin Paper Stock Co. v. Commissioner, 80 T.C. 252, 256–257 (1983), we established the standards for examining the validity of regulations:
The * * * [Secretary] has broad authority to promulgate all needful regulations. Sec. 7805(a); United States v. Correll, 389 U.S. 299, 306–307 (1967). It is well settled that Treasury regulations “must be sustained unless unreasonable and plainly inconsistent with the revenue statutes.” Commissioner v. South Texas Lumber Co., 333 U.S. 496, 501 (1948); accord Commissioner v. Portland Cement Co. of Utah, 450 U.S. 156, 169 (1981). Because they constitute contemporaneous constructions by those charged with administration of these statutes, they “should not be overruled except for weighty reasons.” Bingler v. Johnson, 394 U.S. 741, 750 (1969); Commissioner v. South Texas Lumber Co., supra at 501.
It is equally clear, however, that, although regulations are entitled to considerable weight, “ * * * [the Secretary] may not usurp the authority of Congress by adding restrictions to a statute which are not there.” Estate of Boeshore v. Commissioner, 78 T.C. 523, 527 (1982). See United States v. Marett, 325 F.2d 28, 30 (5th Cir.1963); Coady v. Commissioner, 33 T.C. 771, 779 (1960), affd. 289 F.2d 490 (6th Cir.1961). A regulation is not a reasonable statutory interpretation unless it harmonizes with the plain language of the statute, its origins, and its purpose. United States v. Vogel Fertilizer Co., 455 U.S. 16 (1982); National Muffler Dealers Ass'n v. United States, 440 U.S. 472, 477 (1979).
Consistent with the foregoing, we examine the historical development of section 48(g) and determine whether the regulation in question implements the congressional mandate in a reasonable manner. Ann Jackson Family Foundation v. Commissioner, 97 T.C. 534, 538 (1991).
Prior to 1978, the Internal Revenue Code provided few incentives for the rehabilitation of older buildings. In this regard, the only provisions of any consequence were: (1) Section 191 which allowed certain expenditures incurred in the rehabilitation of certified historic structures to be amortized over a 60–month period; 3 and (2) section 167(o) which allowed accelerated depreciation where rehabilitation expenditures exceeded certain thresholds. At the same time, demolition of historic structures was discouraged through sections 167(n) and 280B. The former provided that the depreciation of a new building erected on a site previously occupied by a certified historic structure would be limited to the straight-line method, while the latter precluded a deduction for the expense of demolishing a certified historic structure.4
In 1978, Congress resolved to further promote the rehabilitation of older buildings by providing an investment tax credit for qualifying rehabilitation expenditures. Faced with concerns respecting the declining usefulness of existing, older buildings throughout the country, primarily in central cities and older neighborhoods of all communities, the House Ways and Means Committee explained:
The committee believes that it is appropriate now to extend the initial policy objective of the investment credit...
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Nalle v. C.I.R.
...external walls in the rehabilitation process.26 U.S.C. Sec. 48(g)(1)(A).3 The Tax Court had upheld the regulation. Nalle v. Commissioner, 99 T.C. 187, 1992 WL 184967 (1992).4 See, e.g., Underwood, 487 U.S. at 569, 108 S.Ct. at 2552 (finding string of court decisions persuasive as to whether......
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...Tax Court later issued an Opinion upholding the regulation and the IRS's position, which the Court of Appeals reversed, see Nalle v. Commissioner, 99 T.C. 187 (1992), rev'd, 997 F.2d 1134 (5th Cir. 1993); but that pro-IRS Tax Court Opinion did not exist as of "the onset of the litigation" a......
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