Rev. Rul. 86-70

Caution: Revoked by 95-16

CARRYOVER; DISALLOWED INTEREST

Published: May 19, 1986

Section 163.-Interest, 26 CFR 1.163-1: Interest deduction in general

  Carryover; disallowed interest. A carryover of disallowed interest is not available to the extent it exceeds taxable income for the taxable year in which it was paid of accrued.

ISSUE

  Under the circumstances described below, is a carryover of disallowed interest on investment indebtedness under section 163(d)(2) of the Internal Revenue Code to a succeeding taxable year available to a taxpayer to the extent that the disallowed interest exceeds the taxpayer's taxable income for the taxable year in which the interest was paid or accrued?

FACTS

  A, an individual taxpayer, had adjusted gross income as defined in section 62 of the Code of $100x in 1984. A's itemized deductions, as defined in section

63(f) (including all investment interest expense) plus A's personal exemptions totaled $190x. A had no unused zero bracket amount as defined in section 63(e). A's deductions as determined before application of section 163(d)(1) did not result in a net operation loss for 1984 as defined in section 172(c). A's computation of the limitation on investment interest under section 163(d)(1) resulted in disallowed interest of $50x. Consequently, A's total allowable deductions under section 63 for 1984 were $140x ($190x - $50x), which exceeded A's adjusted gross income by $40x. Thus, A had no taxable income for 1984.

LAW AND ANALYSIS

  Section 63(b) of the Code defines taxable income, in the case of an individual, as adjusted gross income reduced by the sum of the excess itemized deductions, the deductions for personal exemptions provided by section 151, and the direct charitable deduction.

  Section 163(d)(1) of the Code imposes certain limitations on the amount of interest on investment indebtedness that is allowable as a deduction.

  Section 163(d)(2) of the Code provides that the amount of disallowed investment interest for any taxable year shall be treated as investment interest paid or accrued in the succeeding taxable year.

  Section 163(d)(3)(E) of the Code provides that the term 'disallowed investment interest' means that respect to any taxable year, the amount not allowable as a deduction solely by reason of the limitation in section

163(d)(1).

  Section 163(d)(3)(E) of the Code was enacted as part of the Tax Reform Act of

1969, section 221, 1969-3 C.B. 10, 60. the report of the Committee on Ways and Means relating to this provision, H.R. Rep. No. 91-413 (Part 1), 91st Cong.,

1st Sess. 74 (1969), 1969-3 C.B. 200, 245-46, explains that a carryover of disallowed interest on investment indebtedness is not available to the extent the disallowed interest exceeds the taxpayer's taxable income for the taxable year in which the interest was paid or accrued. In such circumstances, the disallowed interest would not have reduced taxable income even if it had been allowed as a deduction in that year.

  In this case, A's allowable deductions under section 63 of the Code in 1984 exceeded A's adjusted gross income for that year by $40x and resulted in no taxable income. Thus, the disallowed interest would not have reduced A's taxable income in 1984 even if it had been allowed in that year. The $50x of disallowed interest is not therefore disallowed solely by reason of section

163(d)(1), and that amount does not constitute 'disallowed investment interest' that may be carried over to 1985 under section 163(d)(2).

HOLDING

  In the circumstances described above, a carryover of disallowed interest under section 163(d)(2) of the Code to a succeeding taxable year is not available to a taxpayer to the extent that the disallowed interest exceeds the taxpayer's taxable income for the taxable year in which the interest was paid or accrued.

Rev. Rul. 86-70, 1986-1 C.B. 83, 1986-20 I.R.B. 4.