No taxable income limitation for excess investment interest expense carryover.

• Author: Baker, Charles A.

The Tax Court's reviewed decision in Lenz, 101 TC No. 17 (1993), held that investment interest expense not allowed (i.e., suspended), because it exceeded the taxpayer's net investment income for the year in which the interest was paid, should carry over without limitation on the number of years. The amount carried over (suspended) was not limited by the taxable income for the year in which the interest expense was paid. The majority opinion of 12 judges relied on the Court of Appeals decision in Beyer, 916 F2d 153 (4th Cir. 1990), rev'g 92 TC 1304 (1989).

The opinion noted that no limitation appeared in the statute related to taxable income and reasoned that imposition of a taxable income limitation on the carryover of the excess interest expense would discriminate against taxpayers who borrow funds to invest in growth stocks with long-term yields (as opposed to those taxpayers who borrow funds for investments that have short-term returns). The investment expense should continue to be carried over until the yield from a long-term investment is realized. To cut these investors off from their carryovers in years in which they have too little taxable income does not serve the purpose for which the limitation period was enacted.

The majority opinion explained that the IRS relied on the legislative history contained in the House Ways and Means Committee Report, which described a taxable income limitation that was never enacted. Further, the "Blue Book" to the Tax Reform Act of 1969 relied on the same House Report. The other five judges on the court dissented, citing the 1969 House Report, and would not have overruled the Tax Court's Beyer decision.

The Tax Court in Beyer applied the taxable income limitation to interest expense paid in the taxpayer's 1982 year when the taxable income was only $8,095, but imposed no limit on interest expense paid in 1981, since the interest expense was smaller than the taxpayer's joint taxable income of $151,849. The Tax Court further held that the carryover from 1981 would not be limited to taxable income in subsequent years, presumably years after 1982. The Court of Appeals held that the taxable income...