holding that an individual taxpayer was entitled to deduct interest on federal income tax deficiencies that arose from errors made in computing the taxpayer’s business income
How later courts described this case
- holding that an individual taxpayer was entitled to deduct interest on federal income tax deficiencies that arose from errors made in computing the taxpayer’s business income
- “The nuts and bolts of this case is that the Commissioner continues to disagree with the pre-TRA judicial view”
- invalidating sec. 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., 52 Fed. Reg. 48409 (Dec. 22, 1987), after plenary review of statute and legislative history
Written by the judges who cited it.
The opinion
Swift, J., concurring: Two significant facts are clear and undisputed in this case: (1) Under the express language of section 163(h)(2)(A), if an interest expense is properly alloca-ble to a trade or business, then under that statute the interest expense is deductible; and (2) the interest expense at issue herein arose from, in connection with, and is allocable to; petitioners’ business. Accordingly, the interest expense should be deductible.
Under respondent’s regulation and position herein, petitioners’ interest expense is not deductible “regardless” of the fact that it was clearly incurred by petitioners in connection with, and that it is undisputably allocable to, petitioners’ business. Respectfully, respondent’s regulation and position herein should be rejected as an erroneous attempt to redefine the substantive provision of section 163(h)(2)(A).
I reiterate and emphasize that the statute speaks for itself. Thereunder, at the least, if an interest expense clearly relates to. and is allocable to a taxpayer’s business, it is deductible. Respondent’s regulation may provide reasonable methods for allocating interest between a taxpayer’s business and personal activities. But if there is no question as to what an item of interest expense relates to, and is allocable to, then the statute is clear and, if the expense relates to the taxpayers’ business, the statute allows the deduction. Because section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., 52 Fed. Reg. 48409 (Dec. 22, 1987), in the context of a sole proprietorship, provides that regardless of that fact, an interest expense is not deductible, respondent’s regulation should be considered invalid.
The statute mandates an allocation and allows, a .deduction for an interest expense related to a taxpayer’s business. Respondent’s regulation, in the situation of a sole proprietor, would leave nothing to be allocated.
Further, respondent’s position herein and her regulation under section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., 52 Fed. Reg. 48409 (Dec. 22, 1987), is inconsistent with the specific allocation rule provided under section 1.163-8T(c)(3)(ii), Temporary Income Tax Regs., 52 Fed. Reg. 25001 (July 2, 1987), with regard to the frequent situations where no loan proceeds are involved in the underlying transaction or activity (namely, where the seller or provider of goods or services provides the financing to the taxpayer or where the transaction involves interest expenses associated with the mere extension of credit, not the provision of funds). Section 1.163-8T(c)(3)(ii), Temporary Income Tax Regs., supra, provides as follows:
If a taxpayer incurs or assumes a debt in consideration for the sale or use of property, for services, or for any other purpose, or takes property subject to a debt, and no debt proceeds are disbursed to the taxpayer, the debt is treated for purposes of this 'séétibn as if the taxpayer used an amount of the debt proceeds equal to the balance of the debt outstanding at such time to make an expenditure for such property, services, or other purpose. [Emphasis added.]
The above regulation simply provides that in the many situations where financing or credit transactions do not involve the disbursement of any loan proceeds but do involve the extension of credit and interest charges or expenses therefor, the interest expenses are to be allocated .between the taxpayer’s business and personal activity based on the nature of the particular underlying activity giving rise to the extension of credit.
Under section 1.163-8T(c)(3)(ii), Temporary Income Tax Regs., supra, even though no loan proceeds were disbursed to petitioners by the Government, credit was extended to petitioners by the Government, and petitioners were charged interest with regard thereto.
Because the underlying activity in question in this case (giving rise to the tax deficiency and to the Government’s extension of credit to petitioners) undisputedly relates to petitioners’ business, under section 1.163-8T(c)(3)(ii), Temporary Income Tax Regs., supra, the interest expense in question should be treated as allocable to petitioners’ business and as deductible under the statute.
Colvin and Laro, JJ., agree with this concurring opinion.