2003 Tax Ct. Summary LEXIS 163">*163 PURSUANT TO INTERNAL REVENUE CODE SECTION 7463(b), THIS OPINION MAY NOT BE TREATED AS PRECEDENT FOR ANY OTHER CASE.
ARMEN, Special Trial Judge: This case was heard pursuant to the provisions of
Respondent determined deficiencies in petitioners' Federal income taxes for the taxable years 1999, 2000, and 2001 in the amounts of $ 3,961, $ 6,583, and $ 9,715 respectively.2
2003 Tax Ct. Summary LEXIS 163">*164 After concessions by the parties, the sole issue for decision is whether petitioners are entitled to investment interest expense deductions for the taxable years 1999, 2000, and 2001 in excess of the amounts allowed by respondent. We hold that they are not.
Background
Some of the facts have been stipulated, and they are so found. Petitioners resided in Lilburn, Georgia, at the time that their petition was filed with the Court.
Petitioners timely filed their Form 1040, U.S. Individual Income Tax Return, for the taxable year 1999. Petitioners attached to their return Schedule A, Itemized Deductions, and claimed an investment interest expense deduction of $ 31,215. Petitioners calculated this amount on an attached Form 4952, Investment Interest Expense Deduction, as shown below:
Part I. Total Investment Interest Expense
Line 1. Investment interest expense
paid or accrued in 1999 $ 63,807
Line 2. Disallowed investment interest
expense from 1998 Form 4952, line 7 ---
Line 3. Total investment interest expense 63,807
2003 Tax Ct. Summary LEXIS 163">*165 ======
Part II. Net Investment Income
Line 4a. Gross income from property held for
investment (excluding any net gain from the
disposition of property held for investment) 31,215
Line 4b. Net gain from the disposition
of property held for investment $ ---
Line 4c. Net capital gain from the
disposition of property held for
investment ---
Line 4d. Subtract line 4c from line 4b ---
Line 4e. Enter all or part of the amount
on line 4c that you elect to include
in investment income ---
Line 4f. Investment Income.
Add lines 4a, 4d, and 4e. 31,215
Line 5. Investment expenses ---
Line 6. Net investment income.
Subtract line 5 from line 4f. 31,215
======
Part III. Investment Interest Expense Deduction
Line 7. Disallowed investment interest
expense to be carried forward to 2000.
2003 Tax Ct. Summary LEXIS 163">*166 Subtract line 6 from line 3. 32,592
Line 8. Investment interest expense deduction.
Enter the smaller of line 3 or 6. 31,215
[6] Petitioners timely filed their Form 1040 for the taxable year 2000. Petitioners attached to their return Schedule A and claimed an investment interest expense deduction of $ 43,271. Petitioners calculated this amount on an attached Form 4952 as shown below:
Part I. Total Investment Interest Expense
Line 1. Investment interest expense
paid or accrued in 2000 $ 92,036
Line 2. Disallowed investment interest
expense from 1998 Form 4952, line 7 1---
2003 Tax Ct. Summary LEXIS 163">*167 _______
Line 3. Total investment interest expense 92,036
=======
Part II. Net Investment Income
Line 4a. Gross income from property held for
investment (excluding any net gain from the
disposition of property held for investment) 43,271
Line 4b. Net gain from the disposition
of property held for investment $ ---
Line 4c. Net capital gain from the
disposition of property held for
investment ---
Line 4d. Subtract line 4c from line 4b ---
Line 4e. Enter all or part of the amount
on line 4c that you elect to include
in investment income ---
Line 4f. Investment Income.
Add lines 4a, 4d, and 4e. 43,271
Line 5. Investment expenses ---
Line 6. Net investment income.
Subtract line 5 from line 4f. 43,271
2003 Tax Ct. Summary LEXIS 163">*168 =======
Part III. Investment Interest Expense Deduction
Line 7. Disallowed investment interest
expense to be carried forward to 2001.
Subtract line 6 from line 3. 48,765
Line 8. Investment interest expense deduction.
Enter the smaller of line 3 or 6. 43,271
FOOTNOTE TO TABLE
n1Petitioners did not carry forward the disallowed investment interest expense of $ 32,592 from 1999.
END OF FOOTNOTE TO TABLE
Petitioners timely filed their Form 1040 for the taxable year 2001. Petitioners attached to their return Schedule A and claimed an investment interest expense deduction of $ 42,039. Petitioners calculated this amount on an attached Form 4952 as shown below:
Part I. Total Investment Interest Expense
Line 1. Investment interest expense
paid or accrued in 2001 $ 2,779
Line 2. Disallowed investment interest
expense from 2000 Form 4952, line 7 48,765
Line 3. Total investment interest expense 51,544
2003 Tax Ct. Summary LEXIS 163">*169 ======
Part II. Net Investment Income
Line 4a. Gross income from property held for
investment (excluding any net gain from the
disposition of property held for investment) 42,039
Line 4b. Net gain from the disposition
of property held for investment $ ---
Line 4c. Net capital gain from the
disposition of property held for
investment ---
Line 4d. Subtract line 4c from line 4b ---
Line 4e. Enter the amount from line 4c
that you elect to include in investment income ---
Line 4f. Investment Income.
Add lines 4a, 4d, and 4e. 42,039
Line 5. Investment expenses ---
Line 6. Net Net investment income.
Subtract line 5 from line 4f. 42,039
Part III. Investment Interest Expense Deduction
Line 7. Disallowed investment interest
expense to be carried forward to 2002.
Subtract line 6 from line 3. 2003 Tax Ct. Summary LEXIS 163">*170 9,505
Line 8. Investment interest expense deduction.
Enter the smaller of line 3 or 6. 42,039
[8] Petitioners attached a Schedule D, Capital Gains and Losses, to their tax return for each taxable year at issue. Petitioners reported total net capital losses for each taxable year as follows:
1999 2000 2001
____ ____ ____
Net short-term capital
gain or (loss)1 ($ 27,672) ($ 1,781,652) ($ 2,109,359)
Net long-term capital
gain or (loss)2 (9,825) (2,609) (107,733)
2003 Tax Ct. Summary LEXIS 163">*171 ___________ ____________ _____________
Total net capital loss3 (37,497) (1,784,261) (2,217,092)
FOOTNOTES TO TABLE
n1The net short-term capital loss for each taxable year included short-term carryover losses to 1999, 2000, and 2001 of $ 111,114, $ 27,672, and $ 1,781,652, respectively.
n2The net long-term capital loss for each taxable year included long-term carryover losses to 1999, 2000, and 2001 of $ 21,391, $ 9,825, and $ 2,609, respectively.
n3For each taxable year, petitioners deducted the maximum of $ 3,000 of their overall capital losses against ordinary income on their Form 1040, Line 13 (Capital gain or (loss)). See sec. 1211(b).
END OF FOOTNOTES TO TABLE
In the notice of deficiency, respondent disallowed a portion of petitioners' investment interest expense deductions2003 Tax Ct. Summary LEXIS 163">*172 for 1999, 2000, and 2001 in the amounts of $ 26,076, $ 38,784, and $ 49,483, respectively.3 Respondent contends that petitioners' "gross income from property held for investment" for 1999, 2000, and 2001 was $ 5,139, $ 4,487, and $ 453, respectively.4 Respondent also argues that because petitioners had a total net capital loss in each of the taxable years at issue, petitioners had zero "net gain from the disposition of property held for investment" for purposes of determining their "net investment income" for each taxable year.5
Petitioners contend that for purposes of determining the "net investment2003 Tax Ct. Summary LEXIS 163">*173 income" for each taxable year, "net gain from the disposition of property held for investment" includes only their items of capital gain. 6 Specifically, petitioners argue that their capital losses and capital loss carryovers are not included in the calculation of "net gain from the disposition of property held for investment".
Discussion7
The parties do not dispute petitioners' entitlement to an investment interest expense deduction under
In resolving this issue, we rely on
The starting point for the interpretation of a statute is the language itself.
1.
As a general rule,
2003 Tax Ct. Summary LEXIS 163">*176 (B) Investment Income. -- The term "investment
income" means the sum of --
(i) gross income from property held for investment
(other than any gain taken into account under clause
(ii)(I)),
(ii) the excess (if any) of --
(I) the net gain attributable to the disposition
of property held for investment, over
(II) the net capital gain determined by only
taking into account gains and losses from dispositions
of property held for investment, plus
(iii) so much of the net capital gain referred to in
clause (ii)(II) (or, if lesser, the net gain referred to in
clause (ii)(I)) as the taxpayer elects to take into account
under this clause. [Emphasis added.]
At issue in the instant case is the calculation of
2. Net Gain
Neither
Neither Black's Law Dictionary, 957 (7th ed. 1999) nor Webster's Third New International Dictionary (1993) specifically defines the term "net gain". However, the ordinary and common usage of the term "net gain" connotes the pecuniary gain remaining after offsetting gains against losses. 2003 Tax Ct. Summary LEXIS 163">*178 Presumably, a prerequisite to the existence of net gain is that the taxpayer's gains exceed the taxpayer's losses.
Black's Law Dictionary (7th ed. 1999) defines the term "net loss" as "The excess of all expenses and losses over all revenues and gains." By analogy, the natural, ordinary, and familiar meaning of the term "net gain" is the excess of all gains over all losses.10
As is relevant herein, the terms "gains" and "losses" include short-term and long-term capital gains and short-term and long-term capital losses, 2003 Tax Ct. Summary LEXIS 163">*179 respectively. For purposes of determining "net short-term capital gain", the prior year's short-term capital loss that is carried forward to the current taxable year under
2003 Tax Ct. Summary LEXIS 163">*180 the portion thereof which is a short-term capital loss carryover
shall be carried over to the succeeding taxable year and
treated as a short-term capital loss sustained in such
succeeding taxable year, and the portion thereof which
constitutes a long-term capital loss carryover shall be carried
over to the succeeding taxable year and treated as a long-
term capital loss sustained in such succeeding taxable
year. The carryovers are included in the succeeding taxable
year in the determination of the amount of the short-term
capital loss, the net short-term capital gain or loss, the long-
term capital loss, and the net long-term capital gain or loss in
such year, the net capital loss in such year, and the capital
loss carryovers from such year. * * *
Income Tax Regs.; emphasis added.]
It follows that because short-term capital loss carryovers and long-term capital loss carryovers are treated as losses in the current taxable year, they are also losses for purposes of determining "net gain" in
Accordingly, we conclude2003 Tax Ct. Summary LEXIS 163">*181 as a matter of law that the term "net gain" for purposes of
2003 Tax Ct. Summary LEXIS 163">*182 As relevant to this case, the Tax Reform Act of 1969 (TRA 1969), Pub. L. 91-172, sec. 221(a), 83 Stat. 574, initially limited the deduction for investment interest expense to $ 25,000, plus the amount of net investment income, plus the amount of long-term capital gain. Again as relevant to this case, the TRA 1969 amendment defined investment income as (i) the gross income from interest and dividends, (ii) the net short-term capital gain attributable to the disposition of property held for investment, and (iii) any amount treated under sections 1245 and 1250 as ordinary income. See
In 1976, Congress revised
2003 Tax Ct. Summary LEXIS 163">*183 In 1986, Congress expanded the scope of the investment interest expense limitation and altered the calculation of the limitation by including "any net gain attributable to the disposition of property held for investment". Tax Reform Act of 1986 (TRA 1986), Pub. L. 99-514, sec. 511(a), 100 Stat. 2320; see H. Conf. Rept. 99-841 (1986), 1986-3 C.B. (Vol. 4) 152, wherein the conference committee articulated the intent to expand the definition of investment income "to include the same items as under * * * [TRA 1976] plus the taxable portion of net gain from the disposition of investment property."15 (Emphasis added.)
Petitioners contend that respondent mischaracterized their investment income for each taxable year at issue by including capital losses and capital loss carryovers. Petitioners argue that
Petitioners' reading of the statute is at odds with the plain language of the statute. Essentially, petitioners attempt to omit the word "net" from the definition of investment income, even though the phrase is clearly found in
We hold as a matter of law that petitioners' capital losses and capital loss carryovers are an integral part of the equation in calculating investment income under
We now turn to petitioner's investment interest expense deductions for the taxable years at issue. Based on the amounts reported by petitioners on their Schedules D, petitioners had a total net capital loss in each taxable year at issue. It follows, then, that petitioners had zero "net gain" in 1999, 2000, and 2001 for purposes of
1999 2000 2001
____ ____ ____
Investment interest expense $ 63,807 $ 92,036 $ 2,779
Disallowed investment interest
expense from prior taxable year --- 2003 Tax Ct. Summary LEXIS 163">*186 58,668 146,217
_______ _______ _______
Total investment interest expense 63,807 150,704 148,996
Gross income from property held
for investment 5,139 4,487 453
Net gain from the disposition of
property held for investment --- --- ---
_______ ________ _______
Net investment income 5,139 4,487 453
Disallowed investment interest
expense to be carried forward to
the next taxable year 58,668 146,217 148,543
Investment interest expense deduction 5,139 4,487 453
D. Conclusion
We hold that "net gain", as that term is used in
We have considered all of the other arguments made by petitioners and, to the extent that we have not specifically addressed them, we find them to be without merit.
Reviewed and adopted as the report of the Small Tax Case Division.
To reflect the foregoing,
Decision will be entered under Rule 155.
1. Unless otherwise indicated, all subsequent section references are to the Internal Revenue Code in effect for the taxable years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩
2. All numbers are rounded to the nearest dollar.↩
1. Unless otherwise indicated, all subsequent section references are to the Internal Revenue Code in effect for the taxable years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩
1. Unless otherwise indicated, all subsequent section references are to the Internal Revenue Code in effect for the taxable years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩
2. All numbers are rounded to the nearest dollar.↩
3. Respondent concedes that the disallowed portion of investment interest expense deduction for 2001 erroneously includes otherwise deductible mortgage interest.↩
3. Respondent concedes that the disallowed portion of investment interest expense deduction for 2001 erroneously includes otherwise deductible mortgage interest.↩
4. Petitioners concede these amounts of "gross income from property held for investment" for each taxable year at issue.↩
5. Respondent also concedes the amount of investment interest expenses claimed by petitioners for each taxable year at issue.↩
7. We decide the issue in this case without regard to the burden of proof. See sec. 7491; Rule 142(a);
8. The Tax Reform Act of 1969, Pub. L. 91-172, sec. 221(a), 83 Stat. 574, originally enacted
9. The Omnibus Budget Reconciliation Act of 1993, Pub. L. 103-66, sec. 13206(d)(1), 107 Stat. 467, amended
10. See, e.g., similar definitions under
11.
12. We note that respondent has adopted this view and has utilized this definition on Form 4952, General Instructions, for Line 4b (" Net gain from the disposition of property held for investment is the excess, if any, of total gains over total losses from the disposition of property held for investment.").↩
13. H. Rept. 91-413, at 72 (1969),
Where the taxpayer's investment, however, produces little
current income, the effect of allowing a current deduction for
the interest is to produce a mismatching of the investment
income and related expenses of earning that income. In addition,
the excess interest, in effect, is used by the taxpayer to
offset other income, such as his salary, from taxation.↩
14. See H. Rept. 94-658, at 102, 1976-3 C. B. (Vol. 2) 695, 794; S. Rept. 94-938, at 106, 1976-3 C. B. (Vol. 3) 49, 144; Staff of Joint Comm. on Taxation, General Explanation of the Tax Reform Act of 1976, at 103 (J. Comm. Print 1976).↩
15. See also H. Rept. 99-426, at 300 (1986) ("[investment income] also includes the nondeductible portion of net long-term capital gain on investment property."); S. Rept. 99-313, at 805 (1986) ("[investment income] also includes the gain on investment property."); Staff of Joint Comm. on Taxation, General Explanation of the Tax Reform Act of 1986, at 263, 265 (Comm. Print 1987) ("Investment income includes * * * gain (whether long-term or short-term) attributable to the disposition of property held for investment".).↩