REVENUE RULE 95-16

1995-8 I.R.B. 4,

EXCESS INVESTMENT INTEREST CARRYOVER

Published: February 21, 1995

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

Excess investment interest carryover. The carryover of a taxpayer's disallowed investment interest to a succeeding taxable year under section 163(d) of the Code is not limited by the taxpayer's taxable income for the taxable year in which the interest is paid or accrued. Rev. Rul. 86-70 revoked.

ISSUE

Is the carryover of a taxpayer's disallowed investment interest to a succeeding taxable year under s 163(d)(2) of the Internal Revenue Code limited by the taxpayer's taxable income for the taxable year in which the interest was paid or accrued?

LAW AND ANALYSIS

Section 63(a) defines taxable income, for an individual who itemizes deductions, as gross income minus the deductions allowed by Chapter 1 of the Code (other than the standard deduction).

Section 163(a) allows as a deduction all interest paid or accrued within the taxable year on indebtedness.

Section 163(d)(1) limits the amount of investment interest deductible by a taxpayer that is not a corporation to the amount of the taxpayer's net investment income for that taxable year. Section 163(d)(2) provides that the amount of investment interest for any taxable year that is not allowed as a deduction by reason of s 163(d)(1) is treated as investment interest paid or accrued by the taxpayer in the succeeding taxable year.

Section 163(d)(3)(A) defines "investment interest" as any interest allowable as a deduction (determined without regard to s 163(d)(1)) that is paid or accrued on indebtedness properly allocable to property held for investment.

In Rev. Rul. 86-70, 1986-1 C.B. 83, the Service analyzed a limitation imposed on the investment interest carryover under former s 163(d), before its modification by the Tax Reform Act of 1986, Pub.L. 99-514, 100 Stat. 2244. Under former s 163(d)(1), the amount of investment interest otherwise allowable as a deduction under chapter 1 was limited to net investment income for the taxable year, plus certain additional amounts. Former s 163(d)(3) defined disallowed investment interest as the amount not allowable as a deduction solely by reason of former s 163(d)(1). Rev. Rul. 86-70 holds that a taxpayer may not carry over disallowed investment interest to the extent that it exceeds the taxpayer's taxable income in the year the interest was paid or accrued.

Four federal appellate courts and the United States Tax Court (in a reviewed opinion) have rejected the Service position in Rev. Rul. 86-70: Allbritton v. Commissioner, 37 F.3d 183 (5th Cir.1994); Flood v. Commissioner, 33 F.3d 1174 (9th Cir.1994); Sharp v. United States, 14 F.3d 583 (Fed.Cir.1993); Beyer v. Commissioner, 916 F.2d 153 (4th Cir.1990); and Lenz v. Commissioner, 101 T.C. 260 (1993).

Although all these cases involve former s 163(d), the Service believes that the same result is appropriate under current s 163(d). Thus, the Service will follow the Allbritton, Flood, Sharp, Beyer, and Lenz decisions, and allow taxpayers to carry over disallowed investment interest even though it exceeds taxable income. This rule will apply to interest incurred both before and after s 163(d) was modified by the Tax Reform Act of 1986.

HOLDING

The carryover of a taxpayer's disallowed investment interest to a succeeding taxable year under s 163(d) is not limited by the taxpayer's taxable income for the taxable year in which the interest is paid or accrued.

EFFECT ON OTHER DOCUMENTS

Rev. Rul. 86-70 is revoked.

DRAFTING INFORMATION

The principal author of this revenue ruling is John T. Sapienza, Jr., of the Office of the Assistant Chief Counsel (Income Tax and Accounting). For further information regarding this revenue ruling, contact Mr. Sapienza on (202) 622- 1585 (not a toll-free call).

Rev. Rul. 95-16, 1995-8 I.R.B. 4.