Sharp v. U.S.
| Decision Date | 28 December 1993 |
| Docket Number | No. 93-5111,93-5111 |
| Citation | 14 F.3d 583 |
| Parties | -511, 94-1 USTC P 50,001 Jeffrey G. SHARP, Plaintiff-Appellee, v. The UNITED STATES, Defendant-Appellant. |
| Court | U.S. Court of Appeals — Federal Circuit |
Keith A. Jones, Fulbright & Jaworski, L.L.P., Washington, DC, argued for plaintiff-appellee. With him on the brief were Charles W. Hall, John R. Allender, and Ronald W. Adzgery, Fulbright & Jaworski, L.L.P., Houston, TX.
Gilbert Rothenberg, Atty., Dept. of Justice, Washington, DC, argued for defendant-appellant. With him on the brief were Michael L. Paup, Acting Asst. Atty. Gen., Gary R. Allen and Teresa T. Milton, Attys.
Before NEWMAN, LOURIE, and SCHALL, Circuit Judges.
The United States appeals from a decision of the United States Court of Federal Claims 1 granting summary judgment in favor of taxpayer Jeffrey G. Sharp on his claim for a tax refund and denying the United States' cross-motion for summary judgment. Sharp v. United States, 27 Fed.Cl. 52 (Ct.Fed.Cl.1992). Because the Internal Revenue Code ("IRC" or "Code") in effect at the relevant time did not limit the carryover of investment interest to the amount of taxable income in the year the interest was paid or accrued, we affirm.
The material facts are undisputed. Sharp filed an amended tax return for 1987, seeking a refund of taxes in the amount of $59,736.00. 2 For each of the taxable years 1983 through 1986 (the loss years), Sharp paid or accrued investment interest as defined by Sec. 163 of the IRC. See 26 U.S.C. Sec. 163(d)(3)(D). 3 The amount of investment interest that Sharp was able to claim as a deduction for each of these years was limited by Sec. 163(d)(1) to the sum of $10,000 plus Sharp's net investment income (investment income less investment expenses). See 26 U.S.C. Sec. 163(d)(1). For the years in question, Sharp's investment interest exceeded his Sec. 163(d)(1) limitation. Nonetheless, in his return, he claimed that he was entitled to carry over from the loss years and deduct in 1987 the entire amount of his investment interest that exceeded the Sec. 163(d)(1) limitation The following chart will be helpful in understanding Sharp's claim and the computation of his investment interest carryover.
in each loss year pursuant to the carryover provision of Sec. 163. See 26 U.S.C. Sec. 163(d)(2). Sharp computed his carryover of investment interest to be $223,978, obtained by adding the carryover from 1983 to the excess investment interest in 1984, 1985, and 1986.
1983 1984 1985 1986 1987
investment interest paid $42,857 $89,111 $87,292 $92,362 $164,392
net investment income $87,791 $16,321 $ 2,075 $0 $539,035
Sec. 163(d)(1) limitation $97,791 $26,321 $12,075 $10,000 $549,035
excess investment interest $3,609 $62,790 $75,217 $82,362 $0
over Sec. 163(d)(1) limitation 4
taxable income/(loss) $82,300 $(5,852) $42,954 $(6,894) not relevant
IRS's computed carryover $3,609 $0 $42,954 $0 not relevant
limit
The IRS disallowed most of the claimed deduction for carried-over investment interest on the theory that the amount of investment interest a taxpayer was entitled to carry over from a particular loss year was limited by the amount of taxable income for that loss year. The IRS notified Sharp that his claim for refund was disallowed and issued a notice of deficiency, assessing taxes and penalties, which Sharp paid. See supra n. 2. Sharp then filed a complaint seeking a refund in the United States Court of Federal Claims.
In due course, Sharp filed a motion for summary judgment claiming that, as a matter of law, he was entitled to carry over and deduct in 1987 the investment interest he did not deduct in loss years 1983-86 because of Sec. 163(d). The government filed a cross-motion for summary judgment, urging that the investment interest Sharp was entitled to carry over from a loss year was limited to his taxable income in that year. The government based its position on "Sec. 163(d) 'construed as a whole'; the general 'scheme of interest deductibility in general' revealed in the legislative history of Sec. 163(d); and the text of Sec. 172(d)(4)." 5 Sharp, at 55.
Contrary to the government's position, the trial court held that according to the plain meaning of the statute, "disallowed investment interest" for the purpose of the carryover subsection (d)(2) is interest "not allowable" as a deduction solely by reason of the limitation in subsection (d)(1), irrespective of whether the interest exceeds taxable income for a loss year. 6 The court was not persuaded by contrary statements in the legislative history because it concluded that Sec. 163(d)(2) was not ambiguous and the legislative history was "equivocal" and not a good indication of Congressional intent. The court refused to elevate statements in the legislative history over the plain language of the statute. The court concluded that to permit the carryover of investment interest from a loss year in excess of taxable income for that loss year would be consistent with the purpose of Sec. 163(d), which is to offset investment income against expenses from the same type of investment activity.
We review a decision of the Court of Federal Claims to grant or deny summary judgment de novo. See Quaker State Oil Refining Corp. v. United States, 994 F.2d 824, 826 (Fed.Cir.1993). Under that standard, we evaluate the correctness of the decision as a matter of law and decide de novo whether genuine issues of material fact exist. Id. There being no dispute as to any material fact here, our review of the decision below turns on the proper interpretation of Sec. 163, a question of law for our de novo determination. See id. at 826-27.
In determining whether or not the Court of Federal Claims erred in concluding that Sharp is entitled to summary judgment, we must decide whether Sec. 163(d)(2), which authorizes a carryover of certain investment interest, permits a taxpayer to carry over from a loss year and deduct in a future year investment interest that exceeds his taxable income in the loss year. Specifically, we must determine whether the portion of investment interest in excess of taxable income that is not allowable as a current deduction by virtue of Sec. 163(d)(1) constitutes "disallowed investment interest" as defined by Sec. 163(d)(3)(E) and thus may be carried over pursuant to Sec. 163(d)(2). The government argues that the carryover is subject to an implicit limitation equal to the taxpayer's taxable income for the year in which the deductible expense was incurred. Sharp argues that no such limitation exists. We agree with Sharp.
In interpreting a statute, we first turn to its language. VE Holding Corp. v. Johnson Gas Appliance Co., 917 F.2d 1574, 1579 (Fed.Cir.1990), cert. denied, 499 U.S. 922, 111 S.Ct. 1315, 113 L.Ed.2d 248 (1991) (citing Mallard v. United States Dist. Court for S. Dist. of Iowa, 490 U.S. 296, 300-01, 109 S.Ct. 1814, 1817, 104 L.Ed.2d 318 (1989)). Section 163 deals with the deduction of interest and provides, in pertinent part
Sec. 163 Interest
(a) General Rule
There shall be allowed as a deduction all interest paid or accrued within the taxable year on indebtedness.
....
(d) Limitation on Interest on Investment Indebtedness
(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 ..., plus
(B) the amount of the net investment income (as defined in paragraph (3)(A))
....
(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.
For purposes of this subsection--
The term "net investment income" means the excess of investment income over investment expenses.
....
but only to the extent such income, gain, and amounts are not derived from the conduct of a trade or business.
The term "investment expenses" means the deductions allowable under sections 162, 164(a)(1) or (2), 166, 167, 171, 212, or 611 directly connected with the production of investment income.
....
(i) In general The term "investment interest" means interest paid or accrued on indebtedness incurred or continued to purchase or carry property held for investment.
....
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).
26 U.S.C. Sec. 163 (1982 and Supp. III 1985) (emphasis added).
Pursuant to Sec. 163(a), Sharp was permitted to deduct all interest paid or accrued within a taxable year on indebtedness to purchase or carry his investment property up to the amount defined in subsection (d)(1). Sharp's investment interest otherwise allowable as a deduction was limited by subsection (d)(1) to $10,000 plus the amount of his net investment income (the excess of his investment income over his investment expenses). Sharp was permitted under the carryover provision, subsection (d)(2), to treat as investment interest paid or accrued in the succeeding taxable year the amount of "disallowed investment interest" for any earlier taxable year. Subsection (d)(3)(E) defines "disallowed investment...
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