Edward A. Robinson III and Diana R. Robinson, Petitioners v. Commissioner of Internal Revenue, Respondent, 119 T.C. 44

Chabot, Judge: Respondent determined a deficiency in Federal individual income tax for 1995 against petitioners in the amount of $29,879. The issue for decision is whether petitioners may deduct for 1995 the interest they paid in 1995 on their 1987 Federal individual income tax underpayment. FINDINGS OF FACT Some of the facts have been stipulated; the stipulations and the stipulated exhibits are incorporated herein by this reference. Petitioners Edward A. Robinson III (hereinafter sometimes referred to as Edward), and Diana R. Robinson resided in Louisiana when they filed their petition in the instant case. A.

Edward’s Background In 1970, Edward graduated from Grambling State University cum laude with a double major in political science and English. In 1971, Edward received a master’s degree in criminal jurisprudence from the State University of New York at Albany. In 1975, Edward received his law degree from Rutgers University. Edward also was awarded an honorary LL.D. from World University, in Tucson, Arizona. After his Rutgers graduation, Edward worked as the chief administrator of the Louisiana Justice Department. Edward resigned from this position and opened his own law practice in 1979.

Edward’s law practice focused almost exclusively on personal injury cases. At all relevant times, Edward’s law practice was operated as a sole proprietorship. B. 1987 Return and Audit Thereof During 1989, respondent audited petitioners’ 1986 and 1987 joint tax returns. On their 1987 tax return, petitioners reported $6,274 interest income and $60,677 net profit from Edward’s law practice. On the 1987

Schedule C, petitioners reported $388,000 gross receipts, $18,500 cost of goods sold, and $308,823 deductions, leading to the $60,677 net profit. On the 1987 Form 1040, petitioners reported $3,866

chapter 1 income tax, $5,387

chapter 2 self-employment tax, $502 addition for underpayment of estimated tax, and no withholding or other payments, for a total of $9,755 owed. Petitioners timely paid this $9,755. Respondent proposed adjustments to petitioners’ 1987 taxable income, and a deficiency and additions to tax as shown in the following table. Item Amount Unreported income1. $25,377.81 Sched. C adjustments — net . 195,715.95 Sched. A adjustment — consequential2 . 6,389.00 Sched. A adjustments — other .

(658.59) Deficiency . 83,632.30 Addition — sec. 6653(a)(1)(A) . 4,181.62 Addition — sec. 6653(a)(1)(B) . 3 Addition — sec. 6661 . 20,908.08 All of the unreported income was from Edward’s law practice. Reduction in medical expense deduction, resulting from increase in adjusted gross income because of additional income from Edward’s law practice. 50 percent of the interest on $83,632.30. Petitioners agreed to these proposed changes, and the appropriate amounts were assessed.

Respondent seized certain of petitioners’ property in 1994, sold the property in 1995, and in 1995 applied $69,617 of the proceeds to petitioners’ interest on the underpayment of their 1987 tax liability. The $69,617 interest payment was not related to any liability on petitioners’ 1987 tax return as originally filed, as all such liability had been timely paid. This interest payment was applied only to interest assessed as a result of the 1987 audit deficiency in tax and additions. Petitioners deducted this $69,617 as “Interest: * * * Other” on line 16b of the

Schedule C (Edward’s law practice) on their 1995 tax return. On their 1995 tax return, petitioners reported $359,915 net profit from Edward’s law practice (Schedule C), $1,410 royalty income (Schedule E), and a $1,702 loss on sales of business property (Form 4797). On the 1995

Schedule C, petitioners reported $523,480 gross receipts, $26,340 cost of goods sold, and $137,225 deductions (including the disputed $69,617 other interest item), leading to the $359,915 net profit. On the 1995 Form 1040, petitioners reported $108,735

chapter 1 income tax, $17,228

chapter 2 self-employment tax, $59 addition for underpayment of estimated tax, and $110,000 estimated tax payments, for a total of $16,022 owed. The $69,617 was interest paid in 1995, but it was not on indebtedness properly allocable to Edward’s law practice, petitioners’ only relevant trade or business. OPINION A. The Parties’ Contentions The parties focus their dispute on whether

section 163 prohibits allowance of petitioners’ claimed $69,617

Schedule C interest deduction; in particular whether the interest is “on indebtedness properly allocable to a trade or business”, within the meaning of

section 163(h)(2)(A), and therefore exempt from the general disallowance rule of

section 163(h). Petitioners contend that the $69,617 interest qualifies for the exemption from the disallowance rule and that a regulation to the contrary is invalid, relying on this Court’s opinions to that effect. In the alternative, they contend that the regulation is not an authoritative

interpretation of the applicable statutory language, the regulation having been issued before the statutory language was enacted. Respondent relies on the regulation as an authoritative

interpretation of an ambiguous statute and notes that the Courts of Appeals of five different circuits have come to the same conclusion. As to the prior opinions on which we relied in invalidating the regulation, respondent’s brief states that “It is therefore respondent’s position that pre-section 163(

h) case law is irrelevant to the resolution of the instant case.” In the alternative, respondent contends that, if we were to conclude “that deficiency interest attributable to a trade or business is deductible, then an allocation of the deficiency interest in this case to the

Schedule C adjustments and to the

Schedule A adjustments for the 1987 year, will be required.” Neither side contends that we should distinguish between the factual settings presented in our two prior opinions on this subject. Apart from respondent’s alternative contention as to the 1987

Schedule A adjustments, respondent apparently accepts that, if the regulations are not valid, then the interest expense resulting from the 1987

Schedule C adjustments is properly a 1995

Schedule C deduction. B.

Summary of Conclusions We agree with respondent’s primary position and much of respondent’s analysis.

Section 162(

a) allows a deduction for “all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business”; this includes .nterest.

Section 163(

a) allows a deduction for “all interest paid or accrued within the taxable year on indebtedness”; this is allowed even if the interest would not be deductible under

section 162(a). Notwithstanding this broad allowance language, there are statutory limitations on amounts (e.g.,

section 163(d), relating to investment interest) and prohibitions (e.g.,

section 163(f), relating to registration-required obligations), that override not only

section 163, but all of

chapter 1 (section 163(d)(1)) or even “any other provision of law” (section 163(f)(1)). In the instant case we focus on the prohibition in

section 163(h)(1), prohibiting any deduction under

chapter 1 for “personal interest”. The Congress has defined this term comprehensively in

section 163(h)(2), so we focus on the specifics of the relevant part of the definition — “properly allocable to a trade or business” (section 163(h)(2)(A)) — rather than concepts involved in “personal”. Examination of the history of the legislation, both the sequence of events and the formal explanations, does not lead to any clear answer as to the meaning of the finally adopted statutory language. It is clear, however, that the Congress chose language different from the statutory language that had been construed in earlier cases.

This strongly suggests that the Congress intended a meaning different from the older statutory language, but it does not clearly indicate what the Congress intended that difference to be. It is in this setting that we reach the Treasury regulations —

section 1.163-8T, Temporary Income Tax Regs., 52 Fed. Reg. 24999 (July 2, 1987), and

section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., 52 Fed. Reg. 48409 (Dec. 22,1987). It is accepted that these regulations, if not invalid, would result in our concluding that interest on petitioners’ 1987 underpayment of Federal income taxes is nondeductible personal interest. We conclude that, taking into account the uncertainty as to the meaning of the statute, even as informed by the history of the legislation, these regulations constitute a permissible

interpretation of the statute. As a result, the regulations are not invalid, and so petitioners’ claimed interest expense deduction is not allowed under

chapter 1. C. Caselaw Setting of the Issues We first addressed the validity of

section 1.163-8T, Temporary Income Tax Regs., 52 Fed. Reg. 24999 (July 2, 1987), and

section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., 52 Fed. Reg. 48409 (Dec. 22, 1987), in Redlark v. Commissioner, 106 T.C. 31, 34 (1996). At that time, the Court of Appeals for the Eighth Circuit was the only Court of Appeals that had addressed the issue, and it concluded that

section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., supra, is not invalid. Miller v. United States, 65 F.3d 687, 691 (8th Cir. 1995). With all due respect to the Court of Appeals for the Eighth Circuit, we concluded in Redlark v. Commissioner, 106 T.C. at 42, 47, that both

section 1.163-8T, Temporary Income Tax Regs., supra, and

section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., supra, as applied to the facts presented in Redlark were unreasonable. Relying on Redlark v. Commissioner, supra, we held in Kikalos v. Commissioner, T.C. Memo. 1998-92, that the interest on the income tax deficiencies resulting from the operation of the taxpayer-husband’s unincorporated trade or business was deductible under

section 163(h)(2)(

A) because the interest was properly allocable to the taxpayer-husband’s unincorporated trade or business. The Courts of Appeals for the Ninth and Seventh Circuits reversed our decisions in Redlark v. Commissioner, supra, and Kikalos v. Commissioner, supra, respectively, and held that

section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., supra, is a reasonable

interpretation of

section 163(h). Kikalos v. Commissioner, 190 F.3d 791, 799 (7th Cir. 1999), revg. T.C. Memo. 1998-92; Redlark v. Commissioner, 141 F.3d 936, 942 (9th Cir. 1998), revg. and remanding 106 T.C. 31 (1996). The Courts of Appeals for the Fourth and Sixth Circuits also reached the same conclusion. McDonnell v. United States, 180 F.3d 721, 723 (6th Cir. 1999); Allen v. United States, 173 F.3d 533, 538 (4th Cir. 1999). The Courts of Appeals uniformly relied on the following rationale to support their conclusions that

section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., supra, is not invalid:

(1) The regulation is not inconsistent with either the statute or its legislative history, and (2) the regulation is supported by the Staff of the Joint Committee on Taxation, General Explanation of the Tax Reform Act of 1986 (J. Comm. Print 1987), hereinafter referred to as the 1986 Blue Book. Kikalos v. Commissioner, 190 F.3d at 798; McDonnell v. United States, 180 F.3d at 723 (adopting the rationale of Redlark v. Commissioner, 141 F.3d at 936); Allen v. United States, 173 F.3d at 537-538; Redlark v. Commissioner, 141 F.3d at 941; Miller v. United States, 65 F.3d at 690. Although the judicial landscape surrounding

section 163(h)(2)(

A) has changed significantly since our decisions in Redlark v. Commissioner, supra, and Kikalos v. Commissioner, supra, the legislative landscape has not. Since

section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., supra, was published in the Federal Register, the Congress has not amended

section 163(h)(2)(

A) so as to compel a construction of

section 163(h)(2)(

A) contrary to the Secretary’s construction as embodied in

section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., supra. The Courts of Appeals for the Fourth, Seventh, and Eighth Circuits pointed to the Congress’s failure to amend

section 163(h)(2)(

A) as additional evidence that the regulation is reasonable. Kikalos v. Commissioner, 190 F.3d at 799 (7th Cir.); Allen v. United States, 173 F.3d at 538 (4th Cir.); Miller v. United States, 65 F.3d at 690 (8th Cir.). We have considered the opinions of the Courts of Appeals for the Fourth, Sixth, Seventh, Eighth, and Ninth Circuits; those opinions are entitled to all due respect. Lardas v. Commissioner, 99 T.C. 490, 494 (1992). Appeal in the instant case, however, lies to the Court of Appeals for the Fifth Circuit, which has yet to address the issue presented herein.

Accordingly, we proceed to reconsider our opinions in Redlark v. Commissioner, supra, and Kikalos v. Commissioner, supra. We set forth the pertinent provisions of

section 163(h). We then trace the history of the enactment of these provisions, from Executive Branch proposals through the legislative process of the Tax Reform Act of 1986 (H.R. 3838, the Ways and Means Committee’s “clean bill”) and the retroactive amendments enacted in the Technical and Miscellaneous Revenue Act of 1988 (tamra 1988). We then evaluate the status of the regulations. D. The Statute

Section 163(

a) provides for the deductibility of all interest paid or accrued in the taxable year on indebtedness. The other subsections of

section 163 provide limitations, particularized rules, or

definitions with regard to the allowance rule of subsection (a). As applicable to 1995, the year before us,

section 163(

h) provides, in pertinent part, as follows: SEC. 163. INTEREST. (

h) Disallowance of Deduction for Personal Interest.—

(1) In general. — In the case of a taxpayer other than a corporation, no deduction shall be allowed under this

chapter [chapter 1, relating to normal taxes and surtaxes] for personal interest paid or accrued during the taxable year.

(2) Personal interest. — For purposes of this subsection, the term “personal interest” means any interest allowable as a deduction under this

chapter other than— (

A) interest paid or accrued on indebtedness properly allocable to a trade or business (other than the trade or business of performing services as an employee), (

B) any investment interest (within the meaning of subsection (d)), (

C) any interest which is taken into account under

section 469 in computing income or loss from a passive activity of the taxpayer, (

D) any qualified residence interest within the meaning of paragraph (3)), and (

E) any interest payable under

section 6601 on any unpaid portion of the tax imposed by

section 2001 for the period during which an extension of time for payment of such tax is in effect under

section 6163 or 6166 or under

section 6166A (as in effect before its repeal by the Economic Recovery Tax Act of 1981). Petitioners contend that the interest they paid in respect of their 1987 income tax underpayment falls within the terms of

section 163(h)(2)(A); they do not contend that their interest payment falls within the terms of any of the other subparagraphs of

section 163(h)(2). Accordingly, we focus on

section 163(h)(2)(A). E. History of the Legislation (See infra appendix.) In November 1984, the Treasury Department issued a report to the President recommending numerous revisions of the tax laws. One of the proposals was designed to curtail the subsidy implicit in the [then] current law deduction of interest on debt to finance large amounts of passive, tax-preferred, investment assets (such as corporate stock) or extraordinary consumption expenditures (such as second homes). In May 1985, President Reagan issued a report which included a proposal to subject “all interest not incurred in connection with a trade or business” to the

section 163(

d) limitations on investment interest. The House bill followed the President’s proposal in that it would impose a limit on deductibility of “nonbusiness interest”. The latter term was defined to exclude “any interest which is allowable as a deduction in computing adjusted gross income”. The Ways and Means Committee report stated that “Interest expense that is paid or incurred in carrying on a trade or business * * * is not subject to the interest deduction limitation under the bill.” H. Rept. 99-426, at 298 (1985), 1986-3 C.B. (Vol. 2) 1, 298. The Senate amendment separated out the investment interest provisions (in a revised

section 163(d)) and provided a prohibition (new

section 163(h)) on deducting “consumer interest”. The latter term was defined to exclude “interest paid or accrued on indebtedness incurred or continued in connection with * * * the conduct of a trade or business”. The conference committee reached its agreement on August 16, 1986. Thirteen days later, the staff of the Joint Committee on Taxation published a

summary of the agreement (hereinafter sometimes referred to as the Joint Committee staff

summary). Twenty days after that, the conference committee published its report. Thirty-four days after that, the Tax Reform Act of 1986 (TEA 1986), Pub. L. 99-514, 100 Stat. 2085, was enacted. The conference committee generally followed the Senate’s approach, but changed the language to prohibit any deduction for “personal interest”. For our purposes, “personal interest” was defined the same way the Senate bill defined “consumer interest”. The Joint Committee staff

summary stated as follows: Interest on underpayments of tax (other than certain deferred estate taxes) is treated as personal interest under the provision. The conference committee explanation includes the following sentence: Personal interest also generally includes interest on tax deficiencies.

On May 4, 1987, the staff of the Joint Committee on Taxation published the 1986 Blue Book, which included the following: Personal interest also includes interest on underpayments of individual Federal, State or local income taxes notwithstanding that all or a portion of the income may have arisen in a trade or business. * * * On June 10, 1987, the chairman and the ranking minority member of each of the tax-writing committees introduced bills to make technical corrections to tra 1986. Each bill included the following: Subparagraph (

A) of

section 163(h)(2) of the 1986 Code is amended by striking out “incurred or continued in connection with the conduct of” and inserting in lieu thereof “properly allocable to”. [Sec. 105(c)(1) of H.R. 2636 and S. 1350.] Each bill provided that the change was to take effect as though it had been included in TRA 1986. The Ways and Means Committee report stated that the change in

section 163(h)(2)(

A) was intended to make it consistent with the language of

section 469, which also had been enacted in tra 1986. The House of Representatives passed the provision as part of the 1987 Omnibus Budget Reconciliation Act. The Finance Committee approved the same language and described it the same way in its report. For reasons unrelated to this provision, the technical corrections were dropped from the Omnibus Budget Reconciliation Act of 1987, Pub. L. 100-203, 101 Stat. 1330.

The same provisions were then introduced as part of the Technical Correction Act of 1988, with the same effective dates and explanations, and ultimately enacted without change by the Technical and Miscellaneous Revenue Act of 1988 (TAMRA. 1988), Pub. L. 100-647, 102 Stat. 3342. The language thus enacted is what we must construe in the instant case. F. Analysis of the Statute From the foregoing, we draw the following conclusions. 1. Initial Objectives Although the movement to enact what became

section 163(

h) may have started with a concern about subsidizing already-tax-favored investments and “extraordinary consumption expenditures (such as second homes)” (infra appendix, 1. The Treasury Report), the enacted statute is different-narrower in some respects and broader in others— from the original announced objectives. It is not at all unusual for the Congress to act outside the confines of the problem described in the legislative history; the Congress has done so in many different areas of the tax law. See, e.g., Bartels Trust v.

United States, 209 F.3d 147, 153-154 (2d Cir. 2000) (relating to charities’ unrelated trade or business income); Corn Belt Tel. Co. v. United States, 633 F.2d 114, 117-118 (8th Cir. 1980) (relating to the definition of “public utility property” for investment credit purposes); Warrensburg Board & Paper Corp. v. Commissioner, 77 T.C. 1107, 1110-1111 (1981) (relating to subchapter S corporations’ “one-shot” elections); Estate of Beal v. Commissioner, 47 T.C. 269, 271-272 (1966) (relating to includability of the value of certain annuities in decedents’ estates).

Where the Congress has chosen to so legislate, the courts do not confine the statute to the original problem, but rather apply the statute to the net that the Congress has chosen to cast. In light of the evolution of

section 163(

h) over the 4 years from the Treasury Report to tamra 1988, the original objective of the proposal cannot be taken as sufficiently explaining the meaning of

section 163(h)(2)(A). 2. The Varying “Handles”; Definition in the Statute When the Congress enacts a definition of a term, the statutory definition controls over

definitions in general dictionaries. A review of the relevant history of the legislation reveals the varying phraseology that the Congress employed in the legislative process that culminated in the enactment of

section 163(h)(2). Five different terms, or “handles”, were used to describe the interest, the deductions in respect of which the Congress wanted to either limit or disallow: “nonbusiness interest”, “nonbusiness consumer interest”, “consumer interest”, “personal (consumer) interest”, and “personal interest”. The Congress also used varying

definitions for these terms, e.g., “Interest expense that is paid or incurred in carrying on a trade or business” (H. Rept. 99-426, supra at 298, 1986-3 C.B. (Vol. 2) at 298), “interest paid or accrued on indebtedness incurred or continued in connection with— (

i) the conduct of a trade or business” (H.R. 3838, sec. 1421 (as passed by the Senate), 132 Cong. Rec. S8921 (June 26, 1986)). We make these observations because of the apparent focus on the question of whether interest paid in respect of an individual’s Federal income tax liability is a “personal obligation”. See Miller v.

United States, 65 F.3d at 691, stating: that an individual’s income tax liability, regardless of the nature of the income giving rise to the liability, is a personal obligation and that, consequently, interest owed by such individual because of a failure to pay his tax obligation on time necessarily is also a personal obligation. See also Kikalos v. Commissioner, 190 F.3d at 797 (describing as reasonable the view taken by the Secretary therein that interest on income tax deficiencies is personal interest because the obligation to pay income tax is personal); Allen v.

United States, 173 F.3d at 537 (“Pursuant to these allocation rules, deficiency interest is allocable to the payment of income taxes, an expenditure that is purely personal in nature.”); Redlark v. Commissioner, 141 F.3d at 941 (agreeing with the statement of the Court of Appeals for the Eighth Circuit (Miller) “that personal income tax obligations are always essentially personal in nature”).

Despite whatever logical conclusions may flow from the Congress’s use of the term “personal interest” and the Congress’s clearly expressed intention to end the deduction for indebtedness incurred to finance personal consumption expenditures, the instant case does not turn on whether the obligation to pay deficiency interest is a “personal obligation” or whether the payment of Federal individual income tax is a personal consumption expenditure.

Indeed, the obligation to pay home mortgage interest is undoubtedly a “personal obligation”, yet that type of interest expense is excluded from the definition of personal interest. Sec. 163(h)(2)(D). Moreover, as we noted in Redlark v. Commissioner, 106 T.C. at 42: “To conclude that an income tax deficiency is ipso facto a consumption expenditure begs the issue.” Accordingly, the determination whether an item of interest is either a “personal obligation” or a “personal consumption expenditure” is not the talisman for purposes of applying

section 163(h). Rather, the controlling inquiry, as framed by the statute itself, is whether the interest in issue is “properly allocable to a trade or business”. Sec. 163(h)(2)(A). When, as in the instant case, the Congress undertakes to define a term explicitly, “we must follow that definition, even if it varies from that term’s ordinary meaning.” Stenberg v. Carhart, 530 U.S. 914, 942 (2000); Guerrero-Perez v. INS, 242 F.3d 727, 736-737 (7th Cir. 2001); see, e.g. Cherin v. Commissioner, 89 T.C. 986 (1987).

In other words, we are to disregard the connotations of the term, or handle, that the Congress adopts and instead focus on the language that the Congress actually used to define the term. This is especially true where, as in the instant case, the Congress tells us what the term in question “means”. “As a rule, ‘a definition which declares what a term “means” . . . excludes any meaning that is not stated.’” Colautti v. Franklin, 439 U.S. 379, 392-393 n.10 (1979).

If, however, the statute in question uses the word “includes” rather than “means” to define a term, then there is an indication that the definition of the term is exemplary rather than exclusive. Sec. 7701(c); see Winterrowd v. David Freedman & Co., Inc., 724 F.2d 823, 825 (9th Cir. 1984) (citing Highway & City Freight Drivers v. Gordon Transports, Inc., 576 F.2d 1285, 1289 (8th Cir. 1978)). In Cherin v. Commissioner, 89 T.C. at 1000-1001, we addressed, inter alia, whether the taxpayer’s deficiencies were subject to a higher rate of interest under what was then (as to interest accruing after December 31, 1984)

section 6621(c), dealing with interest on a substantial underpayment attributable to a “tax-motivated transaction”. We found as facts in Cherin v. Commissioner, 89 T.C. at 987, 988, 991, that the taxpayer (1) was looking for an investment which would produce significant income for his retirement years, (2) reasonably relied on the advice of his accountant, financial adviser, and attorney to enter into the disputed transaction (a tax shelter involving cattle breeding), and (3) contemplated that he would recover the purchase price of the two herds in which he invested.

Despite these findings which suggested the presence of a profit motive, we concluded that the taxpayer’s deficiencies were subject to the higher rate of interest under

section 6621(c); i.e., that the taxpayer had a substantial underpayment attributable to a “tax-motivated transaction”. Cherin v. Commissioner, 89 T.C. at 1001. We reached our conclusion in Cherin even though the handle the Congress chose, “tax-motivated transaction”, suggested the importance of the taxpayer’s motives. Instead of focusing on the connotations that logically flowed from that handle, we focused on the relevant statutory language, which set forth what the term “tax-motivated transaction” “means”. Sec. 6621(c)(3). In the instant case, in restricting the allowance rule of

section 163(a), the Congress chose the term “personal interest”, and the Congress told us what that term “means” in

section 163(h)(2). As relevant herein, the term “personal interest” means “any interest allowable as a deduction under this

chapter other than — * * * interest paid or accrued on indebtedness properly allocable to a trade or business (other than the trade or business of performing services as an employee)”. Sec. 163(h)(2)(A). Based on this definition of “personal interest” that the Congress set forth, the appropriate inquiry in the instant case is not whether petitioners’ interest on their 1987 income tax deficiency is “personal” but whether it is “properly allocable to a trade or business”. 3. The Pre-TRA 1986 Cases In Redlark v.

Commissioner, 106 T.C. at 34-35, we opened our discussion of the law as it stood before enactment of TRA 1986 as follows: The question remains, however, whether the elements giving rise to the deficiencies to which the interest herein relates are of such a nature as to permit such interest to constitute a business expense within the meaning of

section 162(a), and therefore of

section 62(a), and, as a result, to be characterized as interest “on indebtedness properly allocable to a trade or business” within the meaning of

section 163(h)(2)(

A) in the event that the temporary regulation is not applicable. We think a review of the cases decided prior to the enactment of

section 163(h)(2)(A), in respect of the deductibility of interest on income tax deficiencies as a business expense, will throw light on this question and is therefore a significant element in our analysis of the impact of that

section on petitioners’ claimed interest deduction. It is to that review that we first turn our attention. We then analyzed three opinions: Standing v. Commissioner, 28 T.C. 789 (1957), affd. 259 F.2d 450 (4th Cir. 1958); Polk v. Commissioner, 31 T.C. 412 (1958), affd. 276 F.2d 601 (10th Cir. 1960); Reise v. Commissioner, 35 T.C. 571 (1961), affd. 299 F.2d 380 (7th Cir. 1962). In each of these opinions we held that the interest on a tax underpayment was an ordinary and necessary expense “paid or incurred during the taxable year in carrying on any trade or business” within the meaning of

section 23(a)(1)(A), I.R.C. 1939, the predecessor of

section 162(a). In Standing v. Commissioner, 28 T.C. at 789-795, we also held that the interest on a tax underpayment was “attributable to” the taxpayer’s trade or business within the meaning of

section 22(n)(l), I.R.C. 1939, the predecessor of

section 62(a)(1), hence deductible in arriving at adjusted gross income. In Polk v. Commissioner, 31 T.C. at 415, we noted that the net operating loss language in

section 122(d)(5), I.R.C. 1939 (the predecessor of sec. 172(d)(4)), was identical to the

section 22(n)(l), I.R.C. 1939, language construed in Standing and so should have the same meaning as in Standing. In Reise v. Commissioner, 35 T.C. at 579-580, we noted that neither Standing nor Polk discussed our earlier opinion in Aaron v. Commissioner, 22 T.C. 1370 (1954), in which we had held that interest on a tax underpayment was not attributable to the taxpayer’s trade or business within the meaning of

section 122(d)(5), I.R.C. 1939. In Reise we thereupon overruled Aaron and reaffirmed the position we took in Polk that the interest on the tax underpayment was attributable to the taxpayer’s trade or business. In Redlark v. Commissioner, 106 T.C. at 37, we then summarized the effect of the foregoing cases as follows: Concededly there is some confusion in the reasoning of the decided cases, but the thrust of their bottomline conclusions is clear. Exceptions will be accorded to the “ordinary and necessary” provision of

section 162 only when there is explicit legislative indication that such a result was intended. Thus, we agree with petitioners that there is a consistent body of pre-section 163(

h) case law holding that, at least under limited circumstances such as were involved in Standing v. Commissioner, supra, Polk v. Commissioner, supra, and Reise v. Commissioner, supra, deficiency interest is a deductible business expense under

section 162 and therefore under

section 62(a)(1). See Brennan & Megaard, “Deducting Interest on Noncorporate Trade or Business Tax Deficiencies: Uncertainty Exists Under the New Temporary Regulations”, 13 Rev. of Taxn. of Individuals 22 (1989). Later in our opinion in Redlark v.

Commissioner, 106 T.C. at 43, we, pointed out that we Have consistently been reluctant to conclude that Congress overruled existing case law when the statutory language does not compel such a conclusion and Congress has not otherwise expressly indicated that such a result should ensue. * * * As we noted, supra p. 53, in H.R. 3838 as reported by the Ways and Means Committee, “nonbusiness interest” was defined to exclude “any interest which is allowable as a deduction in computing adjusted gross income”. Proposed amendment to sec. 163(d)(3)(

B) in sec. 402(

a) of H.R. 3838 as reported by the Ways and Means Committee. If that language had been enacted, then our Redlark analysis of the statute would properly have led to the conclusion that interest on a tax underpayment under the circumstances of Redlark and the instant case would continue to be deductible under

section 162 and that

section 163 would not affect that deductibility, and that regulations to the contrary would be contrary to the statute. However, that language was not enacted. See infra, appendix. Instead, in TRA 1986 the Congress defined “personal interest” to exclude “interest paid or accrued on indebtedness incurred or continued in connection with the conduct of a trade or business”. Sec. 163(h)(2)(A) (emphasis added). In TAMRA 1988 the Congress changed the language so as to exclude from personal interest “interest paid or accrued on indebtedness properly allocable to a trade or business.” Sec. 163(h)(2)(A) (emphasis added).

In Standing, Polk, and Reise, the critical statutory language was “in carrying on any trade or business” (sec. 23(a)(1)(A), I.R.C. 1939) and “attributable to” the taxpayer’s trade or business (secs. 22(n)(

l) and 122(d)(5), I.R.C. 1939). In Redlark v. Commissioner, 106 T.C. at 34, 37, we did not deal with the fact that both the enacted TRA 1986 language (“in connection with”) and the enacted TAMRA 1988 language (“properly allocable to”) were different from the “in carrying on” and “attributable to” language interpreted in the pre-TRA 1986 opinions. Ordinarily, we would expect that a change in statutory language indicates a change in meaning. Russello v. United States, 464 U.S. 16, 23 (1983); cf. Elect. Arts, Inc. v. Commissioner, 118 T.C. 226, 242-243 (2002) (and cases there cited).

Application of this general rule (if the statutory language is different, then it is presumed that the meaning is different) to the matter before us leads to the conclusion that

section 163(h)(2)(

A) means something different from the statutory provisions interpreted in the pre-TRA 1986 opinions. We do not intend in the instant case to overrule any of the three pre-TRA 1986 opinions — Standing, Polk, or Reise. The statutory terms construed in those cases have been carried forward from the Internal Revenue Code of 1939 and now appear in

section 162(a) (“paid or incurred * * * in carrying on any trade or business”),

section 62(a)(1) (“attributable to a trade or business carried on by the taxpayer”), and

section 172(d)(4) (“attributable to a taxpayer’s trade or business”). However, the result of the Congress’s decisions (1) to use different language in

section 163(h)(2)(

A) and (2) to provide in

section 163(h)(1) that the disallowance rule overrode everything else in

chapter 1, is that, as to the issue we cited them for in Redlark, the pre-TRA 1986 opinions have become irrelevant to the determination of

chapter 1 tax liabilities. 4. The Conference Report, The 1986 Blue Book In Redlark v. Commissioner, 106 T.C. at 42-45, we discussed the following sentence from the TRA 1986 conference committee explanation- Personal interest also generally includes interest on tax deficiencies —with special focus on “generally” and “tax deficiencies”. We noted that “deficiency” is a term of art with a settled definition.

We interpreted the conference committee sentence as follows, id. at 44-45: In short, we think that when the conference committee used the phrase “tax deficiencies”, it was referring to amounts due by way of income, estate, and gift taxes. In this context, the word “generally” in the conference committee report takes on a significant meaning. It signals that not all interest relating to income tax, etc., deficiencies are included in “personal interest”.

The logical explanation for what is excluded by “generally” is such interest that constitutes an ordinary and necessary business expense and is therefore “allocable to an indebtedness of a trade or business” within the meaning of the exception clause of

section 163(h)(2)(A). To adopt respondent’s position would require us to substitute the word “always” for “generally” and to expand the

interpretation of the word “deficiencies” beyond its accepted meaning to encompass taxes other than income, etc., taxes in order to account for the use of the word “generally”. By way of contrast, our

interpretation accepts the established meaning of “deficiencies” and gives effect to “generally” without modification. We then discussed the 1986 Blue Book’s status and concluded as follows (106 T.C. at 45-46): Where there is no corroboration in the actual legislative history, we shall not hesitate to disregard the General Explanation as far as congressional intent is concerned. See Estate of Wallace v. Commissioner, 965 F.2d 1038, 1050-1051 n.15 (11th Cir. 1992), affg. 95 T.C. 525 (1990); Zinniel v.

Commissioner, 89 T.C. 357, 367 (1987), affd. 883 F.2d 1350 (7th Cir. 1989); see also Livingston, supra at 93 (“The Blue Book is on especially weak ground when it adopts anti-taxpayer positions not taken in the committee reports.”). Given the clear thrust of the conference committee report, the General Explanation is without foundation and must fall by the wayside. To conclude otherwise would elevate it to a status and accord it a deference to which it is simply not entitled. We conclude that there are several difficulties with the foregoing analysis in our opinion in Redlark v. Commissioner, 106 T.C. at 44-46.

For the following reasons, we would not agree that the conference committee explanation has a "clear thrust”. Firstly, interest ordinarily is imposed on underpayments or overpayments, not on deficiencies. See, e.g., secs. 6601, 6611, 6621. There can be an income tax deficiency without an underpayment. There can be an underpayment without an income tax deficiency.

In describing the amendments made by tra 1986 sections 1511 (to sec. 6621, I.R.C. 1986) and 1512 (to sec. 6601, I.R.C. 1986), the Joint Statement of Managers portion of the conference committee report consistently refers to interest on underpayments or overpayments of tax, and it does not refer to interest on tax deficiencies. H. Conf. Rept. 99-841 (Vol. II), at 11-784 to 11-785 (1986), 1986-3 C.B. (Vol. 4) 1, 784-785. Thus, it is not clear whether the term “deficiency’, to which we attributed such significance in Redlark v.

Commissioner, 106 T.C. at 44-45, is merely an inadvertence in one portion of the conference committee report. Secondly, the word “generally’ may merely serve the function of alerting the reader that there is a category of interest on tax underpayments that does not fit into the definition of “personal interest” — to wit, the interest described in subpara-graph (

E) of

section 163(h)(2), as follows: (

E) any interest payable under

section 6601 on any unpaid portion of the tax imposed by

section 2001 for the period during which an extension of time for payment of such tax is in effect under

section 6163 or 6166.[] [Joint Committee staff

summary at 18.] Thirdly, the Joint Committee staff

summary, published 20 days before the conference report, described the provision as follows: Interest on underpayments of tax (other than certain deferred estate taxes) is treated as personal interest under the provision. Apart from the use of “underpayments” rather than “deficiencies”, the Joint Committee staff

summary appears to be completely consistent with the conference committee sentence on which we focused in Redlark v. Commissioner, 106 T.C. at 44-45 — and quite inconsistent with the conclusion we drew in Redlark. Fourthly, even if we were to agree that the use of “deficiencies” in the conference committee sentence is significant, the only significance stated in Redlark v. Commissioner, 106 T.C. at 44, is that it refers to “amounts due by way of income, estate, and gift taxes.” As we noted supra in Secondly and Thirdly, the exclusion provided by subparagraph (

E) of

section 163(h)(2) is an exclusion of interest on estate tax in certain circumstances. This is a far simpler explanation of the conference committee sentence than the labored explanation in Redlark; it provides consistency of meaning among the various documents in the history of the legislation; and it refutes the conclusion in Redlark v. Commissioner, 106 T.C. at 46, that the conference committee sentence has a “clear thrust” that requires us to reject the TRA 1986 Blue Book and to invalidate Treasury regulations.

Of course, if a Blue Book were to conflict with enacted language or controlling legislative history, then the statutory language or the controlling legislative history would prevail. In our view, the conference committee report is not clear regarding which category of interest was intended to be excepted from “personal interest”; i.e., which category made it necessary to qualify the statement about personal interest with “generally”.

The Blue Book identifies another possible category besides interest on a deficiency arising in the case of a sole proprietorship, which contributes to the conclusion that the controlling legislative history’s meaning is unclear. 5. Conclusions From the Statute and the History of the Legislation The relevant statutory language is not the term “personal interest” but the definitional term in subparagraph (

A) of

section 163(h)(2), in the context of the remaining elements of the definition. That definitional term differs from the statutory language construed in the three pre-TRA 1986 opinions relied on in Redlark, and so the meaning of that definitional term presumably is different from the meanings of the statutory language construed in those three opinions. The relevant statutory language does not provide a clear answer to the dispute before us in the instant case.

The history of the legislation clearly shows an evolution in the Congress’s thinking during the legislative process; it provides some support for the validity of the Treasury regulations, but that support is rebuttable. Apart from the analysis in Redlark, that history does not provide support for the conclusion that the Treasury regulations are invalid. In this relatively inconclusive setting, we proceed to examine the Treasury regulations. G. The Regulations In the instant case, we consider the validity of the following regulations:

(1) section 1.163-8T(c)(

l) and (3)(ii), Temporary Income Tax Regs., 52 Fed. Reg. 24999 (July 2, 1987), and

(2) section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., 52 Fed. Reg. 48409 (Dec. 22, 1987). See Redlark v. Commissioner, 106 T.C. at 40-42; see also supra note 6 (regarding the continuing vitality of these temporary regulations, notwithstanding

section 7805(e)(2)). 1. Standards for Judging Validity of Regulations

Section 1.163-8T, Temporary Income Tax Regs., supra, was promulgated under the authority of sections 469(1)(4) and 7805, the basic regulation-prescribing authority for the Treasury Department. T.D. 8145, 1987-2 C.B. 47, 50. In the relevant Notice of Proposed Rulemaking, the Commissioner concluded that

section 1.163-8T, Temporary Income Tax Regs., supra, is an interpretative regulation. 52 Fed. Reg. 25036 (July 2, 1987); 1987-2 C.B. 1053. For purposes of the instant case, we agree with the Commissioner’s conclusion and treat

section 1.163-8T, Temporary Income Tax Regs., supra, as an interpretative regulation because the legislative delegation to the Secretary to prescribe regulations relates to

section 469 only. Sec. 469(1)(4); Hughes Intl. Sales Corp. v. Commissioner, 100 T.C. 293, 303-304 (1993).

Section 1.163-9T, Temporary Income Tax Regs., supra, was promulgated under

section 7805. T.D. 8168, 1988-1 C.B. 80, 83. In the relevant Notice of Proposed Rulemaking, 1988-1 C.B. 926, 927, the Commissioner concluded that

section 1.163-9T, Temporary Income Tax Regs., supra, is an interpretative regulation. For purposes of the instant case, we agree with the Commissioner’s conclusion and treat

section 1.163-9T, Temporary Income Tax Regs., supra, as an interpretative regulation. Although interpretative regulations are entitled to considerable weight, they are accorded less deference than legislative regulations, which are issued under a specific grant of authority to address a matter raised by the relevant statute. Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc. 467 U.S. 837, 843-844 (1984); United States v. Vogel Fertilizer Co., 455 U.S. 16, 24 (1982). Temporary regulations are accorded the same weight as final regulations. Peterson Marital Trust v.

Commissioner, 102 T.C. 790, 797 (1994), affd. 78 F.3d 795 (2d Cir. 1996). An interpretative regulation is to be upheld if it “‘implements] the congressional mandate in some reasonable manner.’” United States v. Vogel Fertilizer Co., 455 U.S. at 24 (quoting United States v. Correll, 389 U.S. 299, 307 (1967)). In making this determination, we employ the following analysis set forth by the Supreme Court: Under the formulation now familiar, when we confront an expert administrator’s statutory exposition, we inquire first whether “the intent of Congress is clear” as to “the precise question at issue.” Chevron U.S A.

Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842 (1984). If so, “that is the end of the matter.” Ibid. But “if the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency’s answer is based on a permissible construction of the statute.” Id., at 843. If the administrator’s reading fills a gap or defines a term in a way that is reasonable in light of the legislature’s revealed design, we give the administrator’s judgment “controlling weight.” Id., at 844. [NationsBank of N.C., N.A. v. Variable Annuity Life Ins.

Co., 513 U.S. 251, 257 (1995).] Accordingly, we must first consider the statute and determine whether

section 163(h)(2)(

A) is silent or ambiguous with respect to the issue before us. If we conclude that it is, then we must consider the Secretary’s regulatory

interpretation of

section 163(h)(2)(

A) on this issue and determine whether that

interpretation represents a permissible construction of the statute. We address each of these considerations in turn. 2. Silence or Ambiguity As set forth supra, the relevant inquiry in the instant case is whether petitioners’ interest on their 1987 income tax underpayment is “properly allocable to a trade or business”. We have concluded (supra F. 5. Conclusions From the Statute and the History of the Legislation) that the statutory text does not on its face provide the answer to the question before us.

By choosing to use a definition different from the statutory phrases we had earlier construed, the Congress apparently intended a meaning different from the meaning of those earlier statutory phrases, but the statutory text does not reveal specifically what that difference is. The history of the legislation provides some support for a specific answer, but that support is rebuttable. Every Court of Appeals which has addressed the issue presented herein has reached the same conclusion that the statute is silent or ambiguous. Kikalos v. Commissioner, 190 F.3d at 797; McDonnell v.

United States, 180 F.3d at 723; Allen v. United States, 173 F.3d at 536 (describing the term “properly allocable” as “manifestly ambiguous”); Redlark v. Commissioner, 141 F.3d at 940 (describing as “untenable” the “assertion that the words, ‘properly allocable’, unambiguously specify that interest on business-related personal income tax deficiencies should be deductible”); Miller v.

United States, 65 F.3d at 690 (describing the Congress’s failure to “define what constitutes business interest” as “an implicit legislative delegation of authority to the Commissioner to clarify whether income tax deficiency interest is ‘properly allocable to a trade or business.’”); see also Tedori v. United States, 211 F.3d 488, 493 (9th Cir. 2000) (“‘the common and ordinary meaning’ of the statutory phrase ‘properly allocable to a trade or business’ is not at all plain”). We conclude that

section 163(h)(2)(

A) is silent or ambiguous. We now proceed to the second prong of our analysis; i.e., whether the regulations in issue are based on permissible constructions of

section 163(h)(2)(A). 3. Permissible Construction To be valid, a regulation need not be the only, or even the best, construction of the statute it purports to implement. Atlantic Mut. Ins. Co. v. Commissioner, 523 U.S. 382, 389 (1998); see Romann v. Commissioner, 111 T.C. 273, 282 (1998). The Supreme Court has stated that a reviewing court- need not conclude that the agency construction was the only one it permissibly could have adopted to uphold the construction, or even the reading the court would have reached if the question initially had arisen in a judicial proceeding. [Chevron U.S A., Inc. v. Natural Res.

Def. Council, Inc. 467 U.S. at 843 n.ll.] Rather, the reviewing court need only conclude that the regulation is reasonable. Cottage Savings Association v. Commissioner, 499 U.S. 554, 560-561 (1991) (citing National Muffler Dealers Association v. United States, 440 U.S. 472, 476-477 (1979)). A regulation is reasonable if it harmonizes with the plain language, origin, and purpose of the statute it purports to implement. United States v. Vogel Fertilizer Co., 455 U.S. at 25-26; National Muffler Dealers Association v. United States, 440 U.S. at 477. a.

Section 1.163-8T, Temporary Income Tax Regs., 52 Fed. Reg. 24999 (July 2, 1987)

Section 1.163-8T, Temporary Income Tax Regs., supra, provides the rules for the allocation of interest expense for purposes of sections 163(d), 163(h), and 469. Sec. 1.163-8T(a)(l), Temporary Income Tax Regs., supra. Although the Congress did not itself devise the allocation rules, the Congress clearly stated how it expected the allocation rules to operate. The Joint Statement of Managers portion of the conference committee report dealing with

section 469 states, in pertinent part, as follows, H. Conf. Rept. 99-841 (Vol. II), supra at 11-146, 1986-3 C.B. (Vol. 4) at 146: Expenses allocable to portfolio income.— The conference agreement provides that portfolio income is reduced by the deductible expenses (other than interest) that are clearly and directly allocable to such income. Properly allocable interest expense also reduces portfolio income. Such deductions accordingly are not treated as attributable to a passive activity.

The conferees anticipate that the Treasury will issue regulations setting forth standards for appropriate allocation of expenses and interest under the passive loss rule. The conferees anticipate that regulations providing guidance to taxpayers with respect to interest allocation will be issued by December 31, 1986. These regulations should be consistent with the purpose of the passive loss rules to prevent sheltering of income from personal services and portfolio income with passive losses.

Moreover, the regulations should attempt to avoid inconsistent allocation of interest deductions under different Code provisions. In the case of entities, a proper method of allocation may include, for example, allocation of interest to portfolio income on the basis of assets, although there may be situations in which tracing is appropriate because of the integrated nature of the transactions involved.

Because of the difficulty of recordkeeping that would be required were interest expense of individuals allocated rather than traced, it is anticipated that, in the case of individuals, interest expense generally will be traced to the asset or activity which is purchased or carried by incurring or continuing the underlying indebtedness. The Congress’s suggestion, however, specifically related to the allocation rules for

section 469 only; the Joint Statement of Managers portion of the conference committee report does not provide a similar prescription for allocating interest expense for purposes of subsections (

d) and (

h) of

section 163. In tamra 1988, the Congress amended subsections (

d) and (

h) of

section 163 to conform the relevant language thereof to the relevant language of

section 469 in order to achieve “consistent application of a standard for allocation of interest” among the “related provisions” of sections 163(d), 163(h), and 469. By conforming the language of subsections (

d) and (

h) of

section 163 to the relevant language of

section 469, the Congress gave a clear indication that the tracing regime it contemplated for purposes of

section 469 is the allocation method that it also intended for subsections (

d) and (

h) of

section 163. See infra, appendix pp. 89-90. An examination of

section 1.163-8T, Temporary Income Tax Regs., supra, shows that the Secretary heeded the Congress’s suggestion.

Section 1.163-8T, Temporary Income Tax Regs., supra, imposes the very tracing regime that the Congress contemplated. Sec. 1.163-8T(a)(3), Temporary Income Tax Regs., supra. In sum, the Congress suggested the means by which to allocate interest expense for purposes of

section 469; the Secretary followed that suggestion; and the Congress later amended the relevant language of

section 163(

d) and (

h) to conform to the relevant language of

section 469. In light of these circumstances, we conclude that the tracing regime that

section 1.163-8T, Temporary Income Tax Regs., supra, imposes is a permissible construction of

section 163(h)(2)(A). In addition to providing rules for the allocation of interest expense,

section 1.163-8T, Temporary Income Tax Regs., supra, also provides rules for the treatment of interest expense so allocated.

Section 1.163-8T(a)(4)(A), Temporary Income Tax Regs., supra, provides that "Interest expense allocated to a trade or business expenditure (as defined in paragraph (b)(7) of this section) is taken into account under

section 163(h)(2)(A)”.

Section 163(h)(2)(

A) is the provision that petitioners contend applies to their payment of interest on their 1987 Federal individual income tax deficiency.

Section 1.163-8T(b)(7), Temporary Income Tax Regs., supra, defines the term “trade or business expenditure” to mean “an expenditure (other than a passive activity expenditure or an investment expenditure) in connection with the conduct of any trade or business other than the trade or business of performing services as an employee.” If an expenditure “is not a trade or business expenditure, a passive activity expenditure, or an investment expenditure”, then

section 1.163-8T(a)(4)(D), Temporary Income Tax Regs., supra, treats the expenditure as personal interest for purposes of

section 163(h). Sec. 1.163-8T(b)(5), Temporary Income Tax Regs., supra. As previously noted,

section 1.163-8T(c)(3)(ii), Temporary Income Tax Regs., 52 Fed. Reg. 25001 (July 2, 1987), allocates petitioners’ payment of interest on their 1987 Federal individual income tax underpayment to the satisfaction thereof. The treatment of petitioners’ interest payment thus depends on whether the payment of one’s Federal individual income tax liability is an expenditure that is “in connection with the conduct of any trade or business”. While reasonable arguments may lie on either side of this issue, the Secretary has undertaken to resolve it in promulgating

section 1.163-9T(b)(2), Temporary Income Tax Regs., 52 Fed. Reg. 48409 (Dec. 22, 1987), and it is our charge not to resolve that issue ourselves, but rather to determine “whether there is any reasonable basis for the resolution embodied in the Commissioner’s Regulation.” Fulman v. United States, 434 U.S. 528, 536 (1978); see also CSX Corp. v. Commissioner, 89 T.C. 134, 153 (1987). We now turn our attention to that task. b.

Section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., 52 Fed. Reg. 48409 (Dec. 22, 1987) As applied to the instant case,

section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., supra, treats petitioners’ payment of interest on their 1987 income tax underpayment as nondeductible “personal interest”. The text of

section 163(h)(2)(

A) does not compel this result. The relevant legislative history, however, lends some support to this

interpretation of the statute. The Joint Committee staff

summary, which we did not consider in Redlark v. Commissioner, 106 T.C. 31 (1996), provides, in pertinent part, as follows: “Interest on underpayments of tax (other than certain deferred estate taxes) is treated as personal interest under the provision [section 163(h)].” Joint Committee staff

summary at 18. Under this view, interest on underpayments of “certain deferred estate taxes” is the only type of interest on underpayments of tax that is excluded from the definition of personal interest. This view supports

section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., supra, which includes interest paid on underpayments of Federal income taxes within the definition of personal interest. We acknowledge that the Joint Committee staff

summary is not the official legislative document for the conference committee’s decisions about TRA 1986; that distinction is accorded the conference committee report. Joint Committee staff

summary at XIII. Further, by definition, the Joint Committee staff

summary may not be a complete or thorough statement of the conference decisions; summaries are designed to cover concisely the main points of the summarized topic, and they may lack specific detail. However, the Joint Committee staff

summary was provided to the Members of the House and Senate for their reference before the Congress enacted TRA 1986, and consequently it is part of the history of the legislation. See, e.g., Newborn v. Commissioner, 94 T.C. 610, 620, 623 (1990). Thus, before the enactment of TRA 1986, the Members of the Congress had before them an

interpretation of

section 163(

h) that included within the definition of “personal interest” interest on underpayments of income tax. Although not as clearly expressed as in the Joint Committee staff

summary, the relevant portions of the Joint Statement of Managers portion of the conference committee report may be read to echo the views expressed in the Joint Committee staff

summary. The relevant portions of the Joint Statement of Managers portion of the conference committee report state that “Personal interest also generally includes interest on tax deficiencies” and that “personal interest does not include * * * interest payable on estate tax deferred under sec. 6163 or 6166.” H. Conf. Rept. 99-841 (Vol. II), supra at 11-154, 1986-3 C.B. (Vol. 4) at 154. These portions of the Joint Statement of Managers portion of the conference committee report may be read to support a view that interest on all tax underpayments other than interest in respect of estate tax deferred under either

section 6163 or 6166 is to be treated as personal interest. Although the Joint Statement of Managers portion of the conference committee report does not speak as clearly to the issue before us as the Joint Committee staff

summary does, one may reasonably view these two pieces of legislative history as being consistent with one another. At the very least, in light of the Joint Committee staff

summary, and the validation of

section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., supra, by five Courts of Appeals, an

interpretation of the Joint Statement of Managers portion of the conference committee report that includes income tax deficiencies within the definition of personal interest cannot be said to be clearly inconsistent with

section 163(h)(2)(A). We so conclude. We reached the opposite conclusion in Redlark v. Commissioner, 106 T.C. at 46, and we used that conclusion as the basis for disregarding the 1986 Blue Book.

The 1986 Blue Book states, in pertinent part, as follows: Personal interest also includes interest on underpayments of individual Federal, State or local income taxes notwithstanding that all or a portion of the income may have arisen in a trade or business, because such taxes are not considered derived from the conduct of a trade or business.60 However, personal interest does not include interest payable on estate tax deferred under sections 6163 or 6166. The above-quoted portion of the 1986 Blue Book clearly supports

section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., supra. In Redlark v. Commissioner, supra, we did not assign any weight to the 1986 Blue Book because we concluded that it conflicted with the Joint Statement of Managers and with what we there believed to be relevant prior caselaw. As we have explained, supra, that caselaw construed statutory language different from what we deal with herein. Also, the 1986 Blue Book is consistent with the Joint Committee staff

summary, and we believe that the Joint Committee staff

summary is consistent with the Joint Statement of Managers. Whether one views the legislative history of

section 163(

h) as inconclusive or as consistent with

section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., supra, the 1986 Blue Book warrants consideration. See FPC v. Memphis Light, Gas & Water Div., 411 U.S. 458, 471-472 (1973); Bank of Clearwater v. United States, 7 Cl. Ct. 289, 294 (1985). Consideration of the 1986 Blue Book (where, as here, it does not conflict with the enacted statutory language and does not conflict with what we have referred to as the conference committee sentence (supra F. 4. Thirdly)), in combination with the Joint Committee staff

summary and the relevant portion of the Joint Statement of Managers portion of the conference committee report points toward a conclusion that

section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., supra, is a permissible construction of

section 163(h)(2)(A). We so conclude. We have concluded that

section 163(h)(2)(

A) is silent or ambiguous. We have also concluded that

section 1.163-8T, Temporary Income Tax Regs., supra, and

section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., supra, are permissible constructions of

section 163(h)(2)(A). Accordingly, we also conclude that both regulations are not invalid. To the extent that Redlark v. Commissioner, supra, is inconsistent herewith, we no longer follow that opinion. H. Petitioners' Alternative Contention Alternatively, petitioners contend that

section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., supra, does not control because it relates to

section 163(h)(2)(

A) as enacted by TEA 1986, not to

section 163(h)(2)(

A) as amended by TAMRA 1988;

section 163(h)(2)(

A) as amended by TAMRA 1988 is the provision which applies in the instant case. Respondent contends that

section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., supra, controls because the amendment to

section 163(h)(2)(

A) was not intended to make any substantive change to the statute. We agree with respondent. As we stated in Redlark v. Commissioner, 106 T.C. at 34 n.3: The amended language, effective for the years in issue, was intended to conform the definition of personal interest to the language of the related passive loss and investment interest limitation provisions, to permit consistent application of a standard for allocation of interest. See S. Rept. 100-445, at 36 (1988); H. Rept. 100-795, at 35 (1988).

There is no indication that the change in language was intended to make any substantive change in the meaning of the statutory language. We hold for respondent on this issue. Decision will be entered for respondent. Reviewed by the Court. Cohen, Whalen, Halpern, Beghe, and Marvel, JJ., agree with the majority opinion. Gerber, Chiechi, and Gale, JJ., concur. Foley, J., did not participate in the consideration of this case. APPENDIX History of the Legislation 1.

The Treasury Report In November 1984, the Treasury Department issued a report to the President entitled “Tax Reform for Fairness, Simplicity, and Economic Growth”, hereinafter sometimes referred to as the Treasury Report. In the Treasury Report, the Treasury Department explained that under then-governing law, all interest expense was “deductible, either as a business or investment expense or as an itemized deduction.” The Treasury Report at 83.

To curtail the subsidy implicit in the [then] current law deduction for interest on debt to finance large amounts of passive, tax-preferred, investment assets (such as corporate stock) or extraordinary consumption expenditures (such as second homes) * * * the Treasury Department proposed to limit the deductions individuals could claim for interest expense “to the sum of mortgage interest on the principal residence of the taxpayer, passive investment income (including interest income), and $5,000 per return.” Id. 2.

The President’s Proposals In May 1985, President Reagan issued a report entitled “The President’s Tax Proposals to the Congress for Fairness, Growth, and Simplicity”, hereinafter sometimes referred to as the President’s Proposals.

Chapter 13.01 of the President’s Proposals addressed interest deductions and proposed to subject, inter alia, “all interest not incurred in connection with a trade or business” to the then-governing limitation on the deduction of investment interest under

section 163(d). The President’s Proposals at 323. Underlying this proposal was a concern that “consumer interest”, defined as “i.e., interest incurred to acquire personal assets, such as a car or vacation home”, undermined the then-existing “limitations on investment interest and interest incurred to acquire tax-exempt bonds.” Id. at 322-323. 3. The House Bill Subsection (

d) of

section 163 in then-current law was entitled “Limitation on Interest on Investment Indebtedness.” In

section 402(

a) of H.R. 3838, the Ways and Means Committee proposed to deal with several concerns by revising subsection (d), which would be reentitled “Limitation on Nonbusiness Interest.” The bill combined the different concerns into a single overall test, as appears from proposed new paragraphs (1) and (3) of subsection (d), as follows: SEC. 402. LIMITATION ON DEDUCTION FOR NONBUSINESS INTEREST. (

a) General Rule. — Subsection (

d) of

section 163 (relating to limitation on interest on investment indebtedness) is amended to read as follows: “(

d) Limitation on Nonbusiness Interest.— “

(1) In general. — In the case of a taxpayer other than a corporation, the amount allowed as a deduction under this

chapter for nonbusiness interest for any taxable year shall not exceed the sum of— “(A) $10,000 ($20,000, in the case of a joint return), plus “(

B) the net investment income for the taxable year. “In the case of a trust, the amount specified in subparagraph (

A) shall be zero. $ ‡ ‡ ‡ “

(3) Nonbusiness interest. — For purposes of this subsection, the term ‘nonbusiness interest’ means any interest allowable as a deduction under this

chapter (determined without regard to paragraph (1)); except that such term shall not include— “(

A) any qualified residence interest, and “(

B) any interest which is allowable as a deduction in computing adjusted gross income and which is not attributable to a limited business interest. For purposes of the preceding sentence, the term ‘interest’ includes any amount allowable as a deduction in connection with personal property used in a short sale.[”] The term “limited business interest” is defined (in subsection (d)(6)) in terms of lack of active participation in the business; it apparently would not apply to Edward’s law practice. As to the prior law’s deductibility of interest in computing adjusted gross income, see supra F. 3.

The Pre-TRA 1986 Cases. The Ways and Means Committee report to accompany H.R. 3838, H. Rept. 99-426 (1985), 1986-3 C.B. (Vol. 2) 1, states, in pertinent part, as follows: B. Interest Deduction Limitations (Sec. 402 of the bill and sec. 163(

d) of the Code) Present Law In general * * * % * * * Under present law, no limitation is imposed under

section 163(

d) on the deductibility of either interest on indebtedness incurred to purchase or carry consumption goods, (i.e., personal (consumer) interest), or interest on indebtedness incurred in connection with the taxpayer’s trade or business. [H. Rept. 99-426, supra at 296, 1986-3 C.B. (Vol. 2) at 296.] Explanation of Provision In general The bill expands the scope of the interest limitation, and alters the calculation of the amount of the limitation.

Under the bill, all nonbusiness interest is subject to the limitation on deductibility, including consumer interest and certain interest that is not treated as investment interest subject to limitation under present law. Nonbusiness interest subject to the limitation under the bill does not include interest on debt secured by the taxpayer’s principal residence (to the extent of its fair market value), and interest on debt secured by a second residence of the taxpayer (to the extent of its fair market value).

Interest expense that is paid or incurred in carrying on a trade or business (except for interest attributable to certain limited business interests not involving low-income housing), is not subject to the interest deduction limitation under the bill. [Id. at 298.] Interest subject to the limitation Under the bill, interest subject to the limitation is all interest on debt not incurred in connection with the taxpayer’s trade or business, other than debt secured by the taxpayer’s residences (as described above). Thus, interest subject to limitation generally includes investment interest subject to the

section 163(

d) limitation under present law and consumer interest, such as interest paid or incurred to purchase an automobile for personal use. * * * [Id. at 299-300.] The House of Representatives passed H.R. 3838 without amendment to

section 402 of H.R. 3838 as reported by the Ways and Means Committee. 4. The Senate’s Amendment H.R. 3838 was received in the Senate on December 18, 1985, and referred to the Finance Committee.

Section 1421 of H.R. 3838 as reported by the Finance Committee separated the above-noted considerations — investment interest and “consumer” interest.

Section 1421(

b) of the Finance Committee’s amendment revised

section 163(

d) but, unlike the House-passed bill, left that Code provision as one dealing with investment interest.

Section 1421(

a) of the Finance Committee’s amendment proposed a new

section 163(h), which provided in pertinent part as follows: SEC. 1421. LIMITATIONS ON DEDUCTION FOR NONBUSINESS INTEREST. (

a) Disallowance op Deduction for Consumer Interest op Individuals. —

Section 163 (relating to deduction for interest) is amended by redesignating subsection (

h) as subsection (

i) and by inserting after subsection (

g) the following new subsection: # * * * * # “(

h) Disallowance op Deduction for Consumer Interest.— “

(1) In general. — In the case of a taxpayer other than a corporation, no deduction shall be allowed under this

chapter for consumer interest paid or accrued during the taxable year. “

(2) Consumer interest. — For purposes of this subsection— “(

A) In general. — The term ‘consumer interest’ means any interest allowable as a deduction under this

chapter other than interest paid or accrued on indebtedness incurred or continued in connection with— “(

i) the conduct of a trade or business (other than the trade or business of performing services as an employee), or “(ii) an activity described in

section 212. “(

B) Exception for qualified residence interest. — The term ‘consumer interest’ shall not include any qualified residence interest.[”] The Senate Finance Committee report, states, in pertinent part, as follows (S. Rept. 99-313, at 802-806 (1986), 1986-3 C.B. (Vol. 3) 1, 802-806): G. Interest Deduction Limitations (sec. 1421 of the bill and secs. 163(

d) and (

h) of the Code) Present Law % * * # * ❖ * Other interest Under present law, no limitation is imposed under

section 163(

d) on the deductibility of interest on indebtedness incurred for other purposes, e.g. to purchase or carry consumption goods. Interest on indebtedness incurred in connection with the taxpayer’s trade or business is also not subject to the

section 163(

d) limitation under present law. Reasons for Change # # íji # ‡ $ Nonbusiness (consumer) interest íji ífi iji # ifc Although the committee believes it would not be advisable to subject to income tax imputed rental income with respect to consumer durables owned by the taxpayer, it does believe that it is appropriate and practical to address situations where consumer expenditures are financed by borrowing. By phasing out the present deductibility of consumer interest, the committee believes that it has eliminated from the present tax law a significant disincentive to saving.

Explanation of Provisions In general The bill expands the scope of the interest limitation, and alters the calculation of the amount of the limitation. Under the bill, all nonbusiness interest is subject to the limitation on deductibility, including consumer interest and certain interest that is not treated as investment interest subject to limitation under present law.

Interest subject to the limitation under the bill does not include interest on debt secured by the taxpayer’s principal residence (to the extent of its fair market value), and interest on debt secured by a second residence of the taxpayer (to the extent of its fair market value). Interest expense that is paid or incurred in carrying on a trade or business is not subject to the interest deduction limitation under the bill (except for interest attributable to certain limited business interests).

In general, under the bill, consumer interest is not deductible, and the deduction for investment interest is limited to investment income for the year with an indefinite carryforward of disallowed investment interest. Investment interest limitation Interest subject to the limitation. —Under the bill, interest subject to the investment interest limitation is all interest (other than consumer interest and qualified residence interest) on debt not incurred in connection with the taxpayer’s trade or business. * * * Consumer interest limitation Under the bill, consumer interest is not deductible.

Consumer interest generally includes all interest not incurred or continued in connection with the conduct of a trade or business (other than the performance of services as an employee) * * *. Thus, consumer interest includes, for example, interest on a loan to purchase an automobile for personal use, and credit card interest incurred for personal expenses. In all material respects,

section 1421 of H.R. 3838 as passed by the Senate on June 24, 1986, was identical to

section 1421 of H.R. 3838 as reported by the Senate Finance Committee.

Section 1401 of the Senate amendment as reported by the Finance Committee proposed to add a new section,

section 469, relating to limitations on losses and credits from passive activities. Neither the House bill nor the President’s Proposals contained a corresponding provision. H. Conf. Rept. 99-841 (Vol. II), at 11-137 (1986), 1986-3 C.B. (Vol. 4) 137; Joint Committee on Taxation, Comparison of Tax Reform Provisions of H.R. 3838 as passed by the House and Senate (JCS-15-86) 51 (July 15, 1986). (Section 501 of the House-passed version of the bill did, however, propose to deny excess passive activity losses for purposes of computing the amount of the alternative minimum taxable income. See TRA 1986 sec. 701, 100 Stat. 2320, 2336; H. Rept. 99-426, supra at 320-323, 1986-3C.B. (Vol. 2) at 320-323.

Section 1401 of the Senate amendment to H.R. 3838 as reported by the Finance Committee provides, in pertinent part, as follows: SEC. 469. LIMITATIONS ON LOSSES AND CREDITS FROM PASSIVE ACTIVITIES. (

h) Regulations. — The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out provisions of this section, including regulations— (1) which specify what constitutes an activity or material participation for purposes of this section, (2) which provide that certain items of gross income will not be taken into account in determining income or loss from any activity (and the treatment of expenses allocable to such income), and (3) if necessary to prevent avoidance of this section, determining whether income, gain, or loss from a limited partnership or other passive activity is treated as described in subsection (c)(3).

The Finance Committee report on H.R. 3838 did not explain how the regulations promulgated under

section 469 were to allocate interest expense. S. Rept. 99-313, supra at 713-746, 1986-3 C.B. (Vol. 3) at 713-746.

Section 1401 of the Senate amendment to H.R. 3838 was amended by a floor amendment and passed; the amendment did not affect the above-quoted language. 132 Cong. Rec. S8817, S8915-8916 (June 26, 1986); Joint Committee on Taxation, Comparison of Tax Reform Provisions of H.R. 3838 as passed by the House and Senate (JCS-15-86) 52 (July 15, 1986). 5. The Conference Committee On August 29, 1986, the staff of the Joint Committee on Taxation published a pamphlet (hereinafter sometimes referred to as the Joint Committee staff

summary) described as follows, Joint Committee staff

summary at XIII: This pamphlet provides a title-by-title

summary of the principal provisions of H.R. 3838 (Tax Reform Act of 1986), as agreed to by the House-Senate Conferees on August 16, 1986. As a general rule, this pamphlet does not describe agreements of the Conferees not to adopt a particular provision that was only in the House-passed bill or only in the Senate-passed bill, i.e., agreements to retain present law on particular issues. This pamphlet is provided for the use of the Members of the House and the Senate. The official legislative document on the conference decisions on H.R. 3838 will be the conference report on the bill (including the Statement of Managers explaining the conference decisions). The Joint Committee staff

summary describes the relevant portion of the conference agreement as follows: C. Interest Deduction Limitation No deduction is allowed for personal interest (such as interest on car loans or credit card balances for personal expenditures). Interest on underpayments of tax (other than certain deferred estate taxes) is treated as personal interest under the provision. * * * [Joint Committee

Summary at 18.] The conference committee report (H. Conf. Rept. 99-841 (Vol. II), supra, 1986-3 C.B. (Vol. 4) 1) was published on September 18,

Section 511 of the conference committee report corresponds to

section 1421 of H.R. 3838 as passed by the Senate. In large part,

section 511(

b) of the conference committee report tracks

section 1421(

a) of H.R. 3838 as passed by the Senate.

Section 511(

b) of the conference committee report presents a new

section 163(h), which provides in pertinent part as follows: SEC. 163(h). Disallowance of Deduction for Personal Interest.—

(1) In general. — In the case of a taxpayer other than a corporation, no deduction shall be allowed under this

chapter for personal interest paid or accrued during the taxable year.

(2) Personal interest. — For purposes of this subsection, the term “personal interest” means any interest allowable as a deduction under this

chapter other than— (

A) interest paid or accrued on indebtedness incurred or continued in connection with the conduct of a trade or business (other than the trade or business of performing services as an employee), (

B) any investment interest (within the meaning of subsection (d)), (

C) any interest which is taken into account under

section 469 in computing income or loss from a passive activity of the taxpayer, (

D) any qualified residence interest (within the meaning of paragraph (3)), and (

E) any interest payable under

section 6601 on any unpaid portion of the tax imposed by

section 2001 for the period during which an extension of time for payment of such tax is in effect under

section 6163 or

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