1990 U.S. Tax Ct. LEXIS 66">*66
S, a domestic building and loan association, filed consolidated returns on a calendar year basis with its affiliated group for all taxable periods from 1971 through Dec. 23, 1982. On Dec. 23, 1982, S was acquired by N. As required by the consolidated return regulations, S reported its income for the period prior to the acquisition on the consolidated Federal income tax return filed by its affiliated group for calendar year 1982. For the short period from Dec. 23, 1982 through Dec. 31, 1982, S filed a separate Federal income tax return. On its return for the short period, S claimed an interest expense deduction for interest which it paid or credited during the short period, but which accrued over the last 6 months of 1982. Respondent determined that under
95 T.C. 35">*36 OPINION
Respondent determined the following deficiencies in and additions to petitioners' Federal income taxes:
Additions to tax | ||||
Year | Deficiency | Sec. 6653(a) 1 | Sec. 6653(a)(1) | Sec. 6653(a)(2) |
1971 | $ 955 | $ 48 | ||
1973 | 191,500 | 9,575 | ||
1974 | 5,791 | 290 | ||
1975 | 115,579 | 5,779 | ||
1976 | 198,682 | 9,934 | ||
1977 | 431,336 | 21,567 | ||
1978 | 608,102 | 30,405 | ||
* 1982 | 1,387,173 | $ 69,359 | 50% of the | |
interest due | ||||
on $ 1,387, 173 |
1990 U.S. Tax Ct. LEXIS 66">*68 After concessions by respondent, the issues remaining for decision are: (1) Whether
The parties submitted this case fully stipulated pursuant to Rule 122. The stipulation of facts, supplemental stipulation of facts, and attached exhibits are incorporated herein.
Petitioner Southern California Savings & Loan Association, a Federal Savings & Loan Association (New SoCal), has its principal place of business in Beverly Hills, California. New SoCal was created by the Federal Savings & Loan Insurance Corp. acting as receiver for Southern California Savings & Loan (SoCal), a domestic building and loan association which in 1985 was declared insolvent by the Federal Home Loan Bank Board.
SoCal filed consolidated1990 U.S. Tax Ct. LEXIS 66">*69 returns on a calendar year basis with its affiliated group, which included First Surety Corp. and its subsidiaries, for all taxable periods from 1971 through December 23, 1982. SoCal maintained its books and computed its taxable income under the cash receipts and disbursements method.
On December 23, 1982, SoCal was acquired by National Trust Group. SoCal reported its income for the period prior to its acquisition on the consolidated Federal income tax return filed by its affiliated group for calendar year 1982. For the short period from December 23, 1982 through December 31, 1982, SoCal filed a separate Federal income tax return.
On its return for the short period, SoCal claimed a deduction of $ 13,759,394 for interest expense. Of the total claimed deduction, $ 245,359 represents miscellaneous interest expense which is not contested by respondent. Of the remainder, $ 7,025,413 represents interest accrued during the last 6 months of 1982, while $ 6,488,622 represents interest accrued solely during December of 1982. All interest for which SoCal claimed a deduction on the short-period return was paid or credited during the short period.
The $ 13,759,394 claimed interest expense1990 U.S. Tax Ct. LEXIS 66">*70 deduction resulted in a net operating loss of $ 5,945,989 for the short period which was carried back to the consolidated returns of 95 T.C. 35">*38 First Surety Corp. and its subsidiaries for 1971 and 1973 through 1978. Respondent determined that petitioner was entitled to an interest expense deduction of $ 2,453,394 for the short period and that the rest of the claimed interest deduction, or $ 11,306,000, must be claimed in equal portions over the next 9 succeeding taxable years.
Section 1501 provides that an affiliated group of corporations may file a single consolidated return in lieu of separate returns. The section further provides that in the case of a corporation which is a member of the affiliated group for a fractional part of the year, the consolidated return shall include the income of such corporation for such part of the year as it is a member of the affiliated group.
If the consolidated return of an affiliated group includes the income of a corporation for only a fractional part of the year, then the income for the part not included in the consolidated return must be included in a separate return.
Corporations P and S, a group of corporations, filed a consolidated return for the calendar year 1966. As of the close of June 30, 1967, all of the stock of S was sold to individual A. P must file a consolidated return for 1967 including P's income for the entire taxable year and the income of S for the period of January 1, 1967, through June 30, 1967. S must file a separate return for the period July 1, 1967, through December 31, 1967.
If the taxable income of a corporation must be included in part in a consolidated return and in part in a separate return, the taxable income to be reported in each such return is determined on the basis of the corporation's income as shown on its permanent records, including work papers.
The regulations also provide that any period of less than 12 months for which either a separate return or a consolidated return is filed under the provisions of
Respondent concedes that SoCal filed a separate short-period return because it was required to do so by the consolidated return regulations. Respondent also concedes that had SoCal's taxable year not been bifurcated the full amount of the contested interest would be deductible on the 1982 consolidated Federal income tax return of its affiliated group. Respondent does not contend that in claiming the interest expense on its short-period return SoCal failed to comply with the consolidated return regulations.
Respondent argues that, despite SoCal's compliance with the consolidated return regulations, the interest expense deduction it claimed for the short period is limited by
Prior to 1962, the year
Due to this change, domestic building and loan associations would be liable for appreciably increased income tax. Congress was concerned that, by postponing the payment of interest accrued during 1962, domestic building and loan associations would bunch interest deductions into 1963 or subsequent years and thus avoid a tax liability.
As to a short period, the regulations provide that amounts of dividends or interest paid or credited shall not be allowed as a deduction to the extent that such amounts are paid or credited for a period representing more than the number of months in such short period.
The amount of interest expense disallowed by
Respondent argues that the interest expense deduction claimed by SoCal on its short-period1990 U.S. Tax Ct. LEXIS 66">*75 return is limited by
In
1990 U.S. Tax Ct. LEXIS 66">*76 As in
In addition to his
Section 591 provides that a domestic building and loan association is allowed a deduction for amounts paid or credited to depositors as interest if such amounts1990 U.S. Tax Ct. LEXIS 66">*77 are withdrawable on demand, subject only to customary notice of intention to withdraw. We have held that respondent may not reject, as not providing a clear reflection of income, a method of accounting employed by the taxpayer which is specifically authorized in the Code and has been applied on a consistent basis.
95 T.C. 35">*42 In light of the foregoing,
Wells,
While the instant case falls within the language of
In
Legislative history discloses that Congress enacted
The House Report also contains the following statement: "It is contemplated that
Petitioners suggest that Congress might have been referring to section 446(b) (Reply Brief for Petitioners, p. 13), and I agree that that provision is most likely the provision 95 T.C. 35">*44 that Congress had in mind. Respondent does1990 U.S. Tax Ct. LEXIS 66">*81 not offer any other suggestion as to the source of the "already available" authority to which Congress referred. Moreover, respondent's authority under section 446(b) reaches not only overall methods of accounting, but also a taxpayer's method of accounting for specific items of income and expense, such as interest.
Section 446(b) states as follows: "If no method of accounting has been used by the taxpayer, or if the method used does not clearly reflect income, the computation of taxable income shall be made under such method as, in the opinion of the Secretary,
Such distortion might be why respondent does not argue that section 446(b) provides the authority for
Section 591 and
95 T.C. 35">*46 Regarding the possibility that Congressional intent could be frustrated through adherence to a literal interpretation of the statute, I "cannot say that the legislative history * * * is so persuasive as to overcome the language of [the statute]."
In sum, I believe that neither
the power of the Commissioner to prescribe regulations for the administration of the Federal tax laws is not the power to make law but is only the power to carry into effect the will of Congress as expressed by the statute.
While I agree that inquiry into Congressional intent is not foreclosed, Congressional intent does not support the regulation in issue. Because the area appears to be in a state of confusion, I believe the proper course would be legislative correction.
Gerber,
The majority opinion relies upon
In connection with other operative Code provisions, the consolidated regulations may function in one of three ways: (1) The regulations may apply exclusively by expressly excluding the operation of part or all of a specific Code section; 11990 U.S. Tax Ct. LEXIS 66">*89 (2) the application of the regulations may be subject 95 T.C. 35">*48 to the operation of other Code sections; 2 or (3) the regulations may coexist with a Code or regulation provision which is not specifically enumerated in the consolidated regulations. In the context of this case, we deal with the third variety.
Courts have long held that the power granted to promulgate legislative regulations is insufficient to permit the regulator to invalidate a basic concept of tax law or statute. See
1990 U.S. Tax Ct. LEXIS 66">*90 In determining consolidated taxable income, reference is made to the general provisions of the Code. For example,
In the "de-consolidation" situation (where the consolidated return of a group properly includes the income of a corporation for only a portion of such corporation's taxable year)
95 T.C. 35">*50 The problem caused by the majority's choice of preferring the consolidated regulations over the
Assuming arguendo that the majority had found that
We also note that both the majority's opinion and the opinion in
Finally, the majority's1990 U.S. Tax Ct. LEXIS 66">*94 holding would cause anomalous results. Essentially, only consolidated affiliates which report consolidated income and deductions for the entire taxable year may be subject to the anti-bunching provisions of
Accordingly, I respectfully dissent from the majority's opinion.
1. All section references are to the Internal Revenue Code of 1954 as amended and in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩
*. Short taxable year December 23, 1982 through December 31, 1982.↩
1. Several of the sec. 1502 regulations contain express exceptions making the regulations exclusive and causing them to preempt statutory or regulatory provisions which may have provided for a different result than the consolidated regulations. See, for example,
Additionally, the consolidated regulations are legislative in character and have the force and effect of law.
2. See, for example, note 3 concerning
3.