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Megibow v. Commissioner of Internal Revenue

decided: January 4, 1955.

ISAIAH AND REGINA MEGIBOW, PETITIONERS,
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.



Author: Staley

Before MARIS, McLAUGHLIN and STALEY, Circuit Judges.

STALEY, Circuit Judge.

This appeal is brought by Isaiah and Regina Megibow after an unfavorable decision by the Tax Court*fn1 on two questions concerning their 1949 joint income tax return.

In 1944, the taxpayers purchased a house which they occupied as a personal residence until they sold it in late 1949. During that occupancy, they paid $1341.38 for taxes and interest on a mortgage encumbering the property but did not list these expenditures as itemized deductions on their tax returns.In each of those years, the taxpayers took the optional standard deduction allowed by the Internal Revenue Code.

When filing their tax return for 1949, the taxpayers notified the Commissioner for the first time of their election to capitalize the $1341.38, thereby reducing the profit on the sale of the residence in 1949.

The Tax Court upheld the Commissioner's determination that the $1,341.38 was not properly chargeable to capital account and therefore could not be considered in computing the profit realized on the sale of the residence. We agree.

In the Treasury Regulations, the Commissioner has enumerated the taxes and carrying charges which are properly chargeable to capital account with respect to property.*fn2 These include taxes and carrying charges on unimproved property, certain expenditures made to improve or develop property, and any other items which the Commissioner thinks are properly chargeable to capital account.

The taxpayers admit that the taxes and interest which they paid on their personal residence do not fall within the categories mentioned in Section 29.24-5, but they contend that the Regulation is invalid because the Commissioner, under the authority given to him by Section 24(a) (7) of the Code,*fn3 had to treat all types of property alike and could not allow taxes and carrying charges on unimproved property to be charged to capital account unless similar treatment was accorded taxes and carrying charges on all types of property, including a personal residence.*fn4

The Commissioner's position is that his authority under Section 24(a) (7) is not limited so as to prohibit a determination that taxes and carrying charges on certain types of property may be capitalized but that similar taxes and carrying charges on other types of property cannot be capitalized.

The Commissioner's determination of his authority should stand unless plainly inconsistent with the language of the Code, which is not the situation presented.We cannot say that the Regulation is invalid since Section 24(a) (7) of the Code can reasonably be read as the Commissioner has read it.*fn5 Commissioner of Internal Revenue v. South Texas Lumber Co., 1948, 333 U.S. 496, 501, 68 S. Ct. 695, 92 L. Ed. 831; Fawcus Machine Co. v. United States, 1931, 282 U.S. 375, 51 S. Ct. 144, 75 L. Ed. 397.

The taxpayers insist quite vigorously that the Commissioner's interpretation of his authority is diametrically opposed to Congressional intent. In their brief they support their argument by quotations from the House and Senate Reports. An examination of the reports themselves discloses that the taxpayers have used half-sentence quotations which carry an erroneous impression as to the intent of Congress.

Taxpayers' position that Congress intended all property, whether productive, unproductive, improved, or unimproved to be treated alike stems from the 1942 amendment to Section 113(b) (1) (A) and the House and Senate Reports explaining the amendment. Prior to the 1942 amendment, Section 113(b) (1) (A) provided that in computing gain or loss from the sale or other disposition of property, proper adjustment could be made for "expenditures, receipts, losses, or other items, properly chargeable to capital account, including taxes and other carrying charges on unimproved and unproductive real property, but no such adjustment shall be made for taxes or other carrying charges for which deductions have been taken by the taxpayer in determining net income for the taxable year or prior taxable years * *." The only relevant change made by the Revenue Act of 1942 was the deletion of the words "including taxes and other carrying charges on unimproved and unproductive real property." The taxpayers tell us, quoting from the House and Senate Reports, that "The clause with respect to unimproved and unproductive real property has been deleted from Section 113(b) (1) (A) so as to make it clear that the provisions of that subparagraph * * * are not limited to the case of taxes and carrying charges on unimproved and unproductive real property, but apply with equal force whether the property to which account the items are properly chargeable is real or personal, improved or unimproved, productive or unproductive. * * *" Accordingly, the taxpayers continue, when Congress wrote Section 24(a) at the same time and by the same Act which amended 113(b) (1) (A) and said that the Commissioner could determine such taxes and carrying charges that are chargeable to capital account with "respect to property," it intended all property to be treated alike.

But let us fill in the gaps in the taxpayers' quotation from the reports. (The Senate and House Reports use identical language.) The complete sentence to which the taxpayers refer is as follows: "The clause with respect to unimproved and unproductive real property has been deleted from Section 113(b) (1) (A) so as to make it clear that the provisions of that subparagraph, to the effect that no adjustment of basis under that section shall be made for taxes or other carrying charges for which deductions have been taken by the taxpayer in determining net income for the taxable year or prior taxable years,*fn6 are not limited to the case of taxes and carrying charges on unimproved and unproductive property, but apply with equal force whether the property to which account the items are properly chargeable is real or personal, improved or unimproved, productive or unproductive." H.R.Rep. No. 2333, 77th Cong., 2d Sess. 82 (1942); Sen.Rep. No. 1631, 77th Cong., 2d Sess. 98 (1942).

From the complete sentence, it is obvious that that which Congress wanted to make clear was not that they were changing the law substantively and wanted all property treated alike as to what taxes and carrying charges could be capitalized; rather, it was to be made clear that the provisions of 113(b) (1) (A), to the effect that if an ...


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