T.C. Summary Opinion 2003-160

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UNITED STATES TAX COURT

RICHARD GORKES, JR. AND SUSAN GORKES, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 15415-02S.

Filed October 31, 2003.

Richard Gorkes, Jr. and Susan Gorkes, pro sese.

Brianna Basaraba, for respondent.

ARMEN, Special Trial Judge:

This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in

effect at the time that the petition was filed.1

The decision to

be entered is not reviewable by any other court, and this opinion

should not be cited as authority.

Unless otherwise indicated, all subsequent section

references are to the Internal Revenue Code in effect for the

taxable years in issue, and all Rule references are to the Tax

Court Rules of Practice and Procedure.

- 2 Respondent determined deficiencies in petitioners’ Federal

income taxes for the taxable years 1999, 2000, and 2001 in the

amounts of $3,961, $6,583, and $9,715 respectively.2

After concessions by the parties, the sole issue for

decision is whether petitioners are entitled to investment

interest expense deductions for the taxable years 1999, 2000, and

2001 in excess of the amounts allowed by respondent.

We hold

that they are not.

Background

Some of the facts have been stipulated, and they are so

found.

Petitioners resided in Lilburn, Georgia, at the time that

their petition was filed with the Court.

Petitioners timely filed their Form 1040, U.S. Individual

Income Tax Return, for the taxable year 1999.

Petitioners

attached to their return Schedule A, Itemized Deductions, and

claimed an investment interest expense deduction of $31,215.

Petitioners calculated this amount on an attached Form 4952,

Investment Interest Expense Deduction, as shown below:

All numbers are rounded to the nearest dollar.

- 3 -

Part I. Total Investment Interest Expense

Line 1. Investment interest expense

paid or accrued in 1999

Line 2. Disallowed investment interest

expense from 1998 Form 4952, line 7

Line 3. Total investment interest expense

Part II. Net Investment Income

Line 4a. Gross income from property held for

investment (excluding any net gain from the

disposition of property held for investment)

Line 4b. Net gain from the disposition

of property held for investment

Line 4c. Net capital gain from the

disposition of property held for

investment

Line 4d. Subtract line 4c from line 4b

Line 4e. Enter all or part of the amount

on line 4c that you elect to include

in investment income

Line 4f. Investment Income.

Add lines 4a, 4d, and 4e.

Line 5. Investment expenses

Line 6. Net investment income.

Subtract line 5 from line 4f.

Part III. Investment Interest Expense Deduction

Line 7. Disallowed investment interest

expense to be carried forward to 2000.

Subtract line 6 from line 3.

Line 8. Investment interest expense deduction.

Enter the smaller of line 3 or 6.

$63,807

--63,807

31,215

--------31,215

--31,215

32,592

31,215

Petitioners timely filed their Form 1040 for the taxable

year 2000.

Petitioners attached to their return Schedule A and

claimed an investment interest expense deduction of $43,271.

Petitioners calculated this amount on an attached Form 4952 as

shown below:

- 4 -

Part I. Total Investment Interest Expense

Line 1. Investment interest expense

paid or accrued in 2000

Line 2. Disallowed investment interest

expense from 1998 Form 4952, line 7

Line 3. Total investment interest expense

Part II. Net Investment Income

Line 4a. Gross income from property held for

investment (excluding any net gain from the

disposition of property held for investment)

Line 4b. Net gain from the disposition

of property held for investment

Line 4c. Net capital gain from the

disposition of property held for

investment

Line 4d. Subtract line 4c from line 4b

Line 4e. Enter all or part of the amount

on line 4c that you elect to include

in investment income

Line 4f. Investment Income.

Add lines 4a, 4d, and 4e.

Line 5. Investment expenses

Line 6. Net investment income.

Subtract line 5 from line 4f.

Part III. Investment Interest Expense Deduction

Line 7. Disallowed investment interest

expense to be carried forward to 2001.

Subtract line 6 from line 3.

Line 8. Investment interest expense deduction.

Enter the smaller of line 3 or 6.

$92,036

--92,036

43,271

--------43,271

--43,271

48,765

43,271

Petitioners did not carry forward the disallowed investment interest

expense of $32,592 from 1999.

Petitioners timely filed their Form 1040 for the taxable

year 2001.

Petitioners attached to their return Schedule A and

claimed an investment interest expense deduction of $42,039.

Petitioners calculated this amount on an attached Form 4952 as

shown below:

- 5 -

Part I. Total Investment Interest Expense

Line 1. Investment interest expense

paid or accrued in 2001

Line 2. Disallowed investment interest

expense from 2000 Form 4952, line 7

Line 3. Total investment interest expense

Part II. Net Investment Income

Line 4a. Gross income from property held for

investment (excluding any net gain from the

disposition of property held for investment)

Line 4b. Net gain from the disposition

of property held for investment

$ --Line 4c. Net capital gain from the

disposition of property held for

investment

--Line 4d. Subtract line 4c from line 4b

Line 4e. Enter the amount from line 4c

that you elect to include in investment income

Line 4f. Investment Income.

Add lines 4a, 4d, and 4e.

Line 5. Investment expenses

Line 6. Net investment income.

Subtract line 5 from line 4f.

Part III. Investment Interest Expense Deduction

Line 7. Disallowed investment interest

expense to be carried forward to 2002.

Subtract line 6 from line 3.

Line 8. Investment interest expense deduction.

Enter the smaller of line 3 or 6.

$2,779

48,765

51,544

42,039

----42,039

--42,039

9,505

42,039

Petitioners attached a Schedule D, Capital Gains and Losses,

to their tax return for each taxable year at issue.

Petitioners

reported total net capital losses for each taxable year as

follows:

- 6 -

Net short-term capital gain or (loss)1

Net long-term capital gain or (loss)2

Total net capital loss3

1999

($27,672)

(9,825)

(37,497)

2000

($1,781,652)

(2,609)

(1,784,261)

2001

($2,109,359)

(107,733)

(2,217,092)

The net short-term capital loss for each taxable year included short-term

carryover losses to 1999, 2000, and 2001 of $111,114, $27,672, and $1,781,652,

respectively.

The net long-term capital loss for each taxable year included long-term

carryover losses to 1999, 2000, and 2001 of $21,391, $9,825, and $2,609,

respectively.

For each taxable year, petitioners deducted the maximum of $3,000 of their

overall capital losses against ordinary income on their Form 1040, Line 13 (Capital

gain or (loss)). See sec. 1211(b).

In the notice of deficiency, respondent disallowed a portion

of petitioners’ investment interest expense deductions for 1999,

2000, and 2001 in the amounts of $26,076, $38,784, and $49,483,

respectively.3

Respondent contends that petitioners’ “gross

income from property held for investment” for 1999, 2000, and

2001 was $5,139, $4,487, and $453, respectively.4

Respondent

also argues that because petitioners had a total net capital loss

in each of the taxable years at issue, petitioners had zero “net

gain from the disposition of property held for investment” for

purposes of determining their “net investment income” for each

taxable year.5

Respondent concedes that the disallowed portion of

investment interest expense deduction for 2001 erroneously

includes otherwise deductible mortgage interest.

Petitioners concede these amounts of “gross income from

property held for investment” for each taxable year at issue.

Respondent also concedes the amount of investment

interest expenses claimed by petitioners for each taxable year at

issue.

- 7 Petitioners contend that for purposes of determining the

“net investment income” for each taxable year, “net gain from the

disposition of property held for investment” includes only their

items of capital gain.6

Specifically, petitioners argue that

their capital losses and capital loss carryovers are not included

in the calculation of “net gain from the disposition of property

held for investment”.

Discussion7

The parties do not dispute petitioners’ entitlement to an

investment interest expense deduction under section 163(a), but

the parties do dispute the calculation of that deduction.

The

main issue of contention between the parties is whether the term

“investment income”, as defined by section 163(d)(4)(B), includes

petitioners’ capital losses and capital loss carryovers for

purposes of calculating the limitation on the investment interest

expense deduction.

In resolving this issue, we rely on section 163(d) and its

underlying framework and legislative history.

Petitioners contend that they failed to properly include

their capital gains for purposes of calculating the “net gain

from the disposition of property held for investment” on their

Forms 4952 for each taxable year at issue.

We decide the issue in this case without regard to the

burden of proof. See sec. 7491; Rule 142(a); Higbee v.

Commissioner, 116 T.C. 438 (2001).

- 8 A.

Statutory Framework

The starting point for the interpretation of a statute is

the language itself.

Consumer Prod. Safety Comm. v. GTE

Sylvania, Inc., 447 U.S. 102, 108 (1980); see also United States

v. Bryant, 671 F.2d 450, 453 (11th Cir. 1982); Warbelow’s Air

Ventures, Inc. v. Commissioner, 118 T.C. 579, 583 (2002).

interpret the statute with reference to the legislative history

primarily to learn the purpose of the statute and to resolve any

ambiguity in the words contained in the text.

Allen v.

Commissioner, 118 T.C. 1, 7 (2002) (and cases cited therein); see

also City of New York v. Commissioner, 103 T.C. 481, 489 (1994),

affd. 70 F.3d 142 (D.C. Cir. 1995).

Moreover, even where the

statutory language appears clear, we may seek out any reliable

evidence as to legislative purpose.

City of New York v.

Commissioner, supra.

Section 163

As a general rule, section 163(a) allows a deduction for all

interest paid or accrued within the taxable year on indebtedness.

In the case of an individual, however, section 163(d) limits the

amount of the investment interest expense deduction to the

taxpayer’s net investment income for the taxable year.8

In other

words, the higher the taxpayer’s net investment income, the more

The Tax Reform Act of 1969, Pub. L. 91-172, sec. 221(a),

83 Stat. 574, originally enacted sec. 163(d), effective for

taxable years beginning after Dec. 31, 1971.

- 9 investment interest expense the taxpayer is allowed to deduct for

the taxable year.

Furthermore, section 163(d)(2) allows the

taxpayer to carryforward any investment interest expense

disallowed under the general limitation for the taxable year and

deduct it as investment interest expense paid or accrued in the

succeeding taxable year to the extent that the taxpayer has net

investment income in that year.

Section 163(d)(4)(A) defines net investment income as the

excess of investment income over investment expense.

Section

163(d)(4)(B),9 in turn, defines investment income as follows:

(B) Investment Income.--The term “investment

income” means the sum of–(i) gross income from property held for

investment (other than any gain taken into

account under clause (ii)(I)),

(ii) the excess (if any) of–(I) the net gain attributable

to the disposition of property held

for investment, over

(II) the net capital gain

determined by only taking into

account gains and losses from

dispositions of property held for

investment, plus

(iii) so much of the net capital gain

referred to in clause (ii)(II) (or, if

lesser, the net gain referred to in clause

The Omnibus Budget Reconciliation Act of 1993, Pub. L.

103-66, sec. 13206(d)(1), 107 Stat. 467, amended sec.

163(d)(4)(B) effective for taxable years beginning after Dec. 31,

1992.

- 10 (ii)(I)) as the taxpayer elects to take into

account under this clause. [Emphasis added.]

At issue in the instant case is the calculation of section

163(d)(4)(B)(ii)(I).

To that end, the meaning of the term “net

gain” is integral to our analysis.

Net Gain

Neither section 163, the regulations, the case law, nor the

statute’s legislative history defines the term “net gain”.

If a

term is used in the Internal Revenue Code (I.R.C.) without

definition and the legislative history fails to provide any

insight or guidance as to the appropriate definition, we use the

ordinary and common usage of the term in applying that provision.

Texaco Inc. & Subs. v. Commissioner, 101 T.C. 571, 575 (1993),

affd. 98 F.3d 825 (5th Cir. 1996); see Commissioner v. Brown, 380

U.S. 563, 570-571 (1965); Crane v. Commissioner, 331 U.S. 1, 6-7

(1947); Rome I, Ltd. v. Commissioner, 96 T.C. 697, 704 (1991);

Union Pac. Corp. v. Commissioner, 91 T.C. 32, 38-40 (1988); First

Sav. & Loan Association v. Commissioner, 40 T.C. 474, 482 (1963).

We look, therefore, to the ordinary and common usage of the term

“net gain” in applying the statute.

Neither Black’s Law Dictionary, 957 (7th ed. 1999) nor

Webster’s Third New International Dictionary (1993) specifically

defines the term “net gain”.

However, the ordinary and common

usage of the term “net gain” connotes the pecuniary gain

remaining after offsetting gains against losses.

Presumably, a

- 11 prerequisite to the existence of net gain is that the taxpayer’s

gains exceed the taxpayer’s losses.

Black’s Law Dictionary (7th ed. 1999) defines the term “net

loss” as “The excess of all expenses and losses over all revenues

and gains.”

By analogy, the natural, ordinary, and familiar

meaning of the term “net gain” is the excess of all gains over

all losses.10

As is relevant herein, the terms “gains” and “losses”

include short-term and long-term capital gains and short-term and

long-term capital losses, respectively.

For purposes of

determining “net short-term capital gain”, the prior year’s

short-term capital loss that is carried forward to the current

taxable year under section 1212(b)(1)(A) is treated as a shortterm capital loss for such taxable year.11

Income Tax Regs.

Sec. 1.1222-1(b)(1),

Likewise, for purposes of determining “net

See, e.g., similar definitions under sec. 1222(9) that

define “capital gain net income” as “the excess of the gains from

the sales or exchanges of capital assets over the losses from

such sales or exchanges”, and under sec. 1.4692T(e)(3)(ii)(E)(3), Temporary Income Tax Regs., 53 Fed. Reg. 5719

(Feb. 25, 1988), that define “net gain” for purposes of that

section as “the amount by which the gains from the sale of all of

the property * * * exceed the losses (if any) from such sale”.

Sec. 1212(b)(1) provides in pertinent part: “If a

taxpayer other than a corporation has a net capital loss for any

taxable year--(A) the excess of the net short-term capital loss

over the net long-term capital gain for such year shall be a

short-term capital loss in the succeeding taxable year, and (B)

the excess of the net long-term capital loss over the net shortterm capital gain for such year shall be a long-term capital loss

in the succeeding taxable year.”

- 12 long-term capital gain”, the prior year’s long-term capital loss

that is carried forward to the current taxable year under section

1212(b)(1)(B) is treated as a long-term capital loss for such

taxable year.

Sec. 1.1222-1(b)(2), Income Tax Regs.

Furthermore, the pertinent parts of the regulations provide:

the portion thereof which is a short-term capital loss

carryover shall be carried over to the succeeding

taxable year and treated as a short-term capital loss

sustained in such succeeding taxable year, and the

portion thereof which constitutes a long-term capital

loss carryover shall be carried over to the succeeding

taxable year and treated as a long-term capital loss

sustained in such succeeding taxable year. The

carryovers are included in the succeeding taxable year

in the determination of the amount of the short-term

capital loss, the net short-term capital gain or loss,

the long-term capital loss, and the net long-term

capital gain or loss in such year, the net capital loss

in such year, and the capital loss carryovers from such

year. * * * [Sec. 1.1212-1(b)(1), Income Tax Regs.;

emphasis added.]

It follows that because short-term capital loss carryovers and

long-term capital loss carryovers are treated as losses in the

current taxable year, they are also losses for purposes of

determining “net gain” in section 163(d)(4)(B)(ii)(I).

Accordingly, we conclude as a matter of law that the term

“net gain” for purposes of section 163(d)(4)(B)(ii)(I) means the

excess, if any, of total gains over total losses, including

capital loss carryovers, from the disposition of property held

for investment.12

We note that respondent has adopted this view and has

(continued...)

- 13 B.

Legislative History

Section 163(d) was enacted to curb the practice of using the

investment interest expense deduction to offset taxable income

(e.g., noninvestment income) in a current taxable year; i.e., to

prevent the “mismatching” of investment income and investment

expenses.13

As relevant to this case, the Tax Reform Act of 1969 (TRA

1969), Pub. L. 91-172, sec. 221(a), 83 Stat. 574, initially

limited the deduction for investment interest expense to $25,000,

plus the amount of net investment income, plus the amount of

long-term capital gain.

Again as relevant to this case, the TRA

1969 amendment defined investment income as (i) the gross income

from interest and dividends, (ii) the net short-term capital gain

attributable to the disposition of property held for investment,

and (iii) any amount treated under sections 1245 and 1250 as

(...continued)

utilized this definition on Form 4952, General Instructions, for

Line 4b (“Net gain from the disposition of property held for

investment is the excess, if any, of total gains over total

losses from the disposition of property held for investment.”).

H. Rept. 91-413, at 72 (1969), 1969-3 C.B. 200, 245,

states in pertinent part:

Where the taxpayer's investment, however, produces

little current income, the effect of allowing a current

deduction for the interest is to produce a mismatching

of the investment income and related expenses of

earning that income. In addition, the excess interest,

in effect, is used by the taxpayer to offset other

income, such as his salary, from taxation.

- 14 ordinary income.

See sec. 163(d)(3)(B), I.R.C. 1954, as amended

by TRA 1969.

In 1976, Congress revised section 163(d) to reduce the use

of this deduction to shelter noninvestment types of income.14

See sec. 209(a) of the Tax Reform Act of 1976 (TRA 1976), Pub. L.

94-455, 90 Stat. 1542.

The definition of investment income

remained unchanged, but the TRA 1976 amendment eliminated any

offset of investment interest expense against long-term capital

gain.

Id.

In 1986, Congress expanded the scope of the investment

interest expense limitation and altered the calculation of the

limitation by including “any net gain attributable to the

disposition of property held for investment”.

Tax Reform Act of

1986 (TRA 1986), Pub. L. 99-514, sec. 511(a), 100 Stat. 2320; see

H. Conf. Rept. 99-841 (1986), 1986-3 C.B. (Vol. 4) 152, wherein

the conference committee articulated the intent to expand the

definition of investment income “to include the same items as

under * * * [TRA 1976] plus the taxable portion of net gain from

the disposition of investment property.”15

(Emphasis added.)

See H. Rept. 94-658, at 102, 1976-3 C.B. (Vol. 2) 695,

794; S. Rept. 94-938, at 106, 1976-3 C.B. (Vol. 3) 49, 144; Staff

of Joint Comm. on Taxation, General Explanation of the Tax Reform

Act of 1976, at 103 (J. Comm. Print 1976).

See also H. Rept. 99-426, at 300 (1986) (“[investment

income] also includes the nondeductible portion of net long-term

capital gain on investment property.”); S. Rept. 99-313, at 805

(continued...)

- 15 C.

Analysis

Petitioners contend that respondent mischaracterized their

investment income for each taxable year at issue by including

capital losses and capital loss carryovers.

Petitioners argue

that section 163(d)(4)(B)(ii)(I) requires inclusion of only their

capital gains and, furthermore, that “net gain” does not require

inclusion of their capital losses and capital loss carryovers.

Petitioners’ reading of the statute is at odds with the

plain language of the statute.

Essentially, petitioners attempt

to omit the word “net” from the definition of investment income,

even though the phrase is clearly found in section

163(d)(4)(B)(ii)(I).

If we were to adopt petitioners’ reading of

the statute, we would render meaningless Congress’s explicit

reference in section 163(d)(4)(B)(ii) to the term “net gain”.

(Emphasis added.)

Clearly, Congress did not intend this result,

nor do we adopt it.

We hold as a matter of law that petitioners’ capital losses

and capital loss carryovers are an integral part of the equation

in calculating investment income under section 163(d)(4)(B).

Were these losses not included, petitioners would receive a

(...continued)

(1986) (“[investment income] also includes the gain on investment

property.”); Staff of Joint Comm. on Taxation, General

Explanation of the Tax Reform Act of 1986, at 263, 265 (Comm.

Print 1987) (“Investment income includes * * * gain (whether

long-term or short-term) attributable to the disposition of

property held for investment”.).

- 16 double tax benefit.

Under petitioners’ approach, capital gains

would be offset by capital losses and capital loss carryovers and

not subjected to taxation.

Then, those same capital gains that

escaped taxation would be used to increase investment income and,

simultaneously, the investment interest expense deduction.

This

double tax benefit is clearly not permitted by section 163(d).

We now turn to petitioner’s investment interest expense

deductions for the taxable years at issue.

Based on the amounts

reported by petitioners on their Schedules D, petitioners had a

total net capital loss in each taxable year at issue.

follows, then, that petitioners had zero “net gain” in 1999,

2000, and 2001 for purposes of section 163(d)(4)(B)(ii)(I).

Therefore, petitioners have net investment income and allowable

investment interest expense deductions for the taxable years at

issue as follows:

- 17 -

Investment interest expense

Disallowed investment interest expense from

prior taxable year

Total investment interest expense

1999

2000

2001

$63,807

$92,036

$2,779

—-63,807

58,668

150,704

146,217

148,996

Gross income from property held for investment

Net gain from the disposition of property held

for investment

Net investment income

5,139

4,487

453

--5,139

--4,487

--453

Disallowed investment interest expense to be

carried forward to the next taxable year

Investment interest expense deduction

58,668

5,139

146,217

4,487

148,543

453

Conclusion

We hold that “net gain”, as that term is used in section

163(d)(4)(B)(ii)(I), requires inclusion of petitioners’ capital

losses and capital loss carryovers for purposes of calculating

the section 163(d)(1) limitation on the investment interest

expense deduction.

We hold further that petitioners’ investment

interest expense deductions for 1999, 2000, and 2001 are limited

to $5,139, $4,487, and $453, respectively.

In view of the

foregoing, we sustain respondent’s determination on the disputed

issue.

We have considered all of the other arguments made by

petitioners and, to the extent that we have not specifically

addressed them, we find them to be without merit.

- 18 Reviewed and adopted as the report of the Small Tax Case

Division.

To reflect the foregoing,

Decision will be entered

under Rule 155.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.