The opinion of the court was delivered by: WISEMAN
This is a case of first impression involving interpretation of certain alternative minimum tax provisions in effect in 1985. The Frists brought this refund action pursuant to 26 U.S.C. § 7422. The tax year at issue is 1985, antedating the Tax Reform Act of 1986. The United States filed a motion for summary judgment on November 1, 1990, and the Frists filed a cross-motion for partial summary judgment on November 20, 1990. The Court held a hearing, on the cross-motions on August 5, 1991, and took the case under advisement. For the reasons stated below, the Court GRANTS the United States' motion for summary judgment.
The Frists had a net loss for regular tax purposes in 1985 and were required to compute alternative minimum tax liability under § 55 of the Internal Revenue Code of 1954. The Frists had $ 127,857 of interest expenses during 1985, and deducted this entire amount in computing their § 55 liability. The Internal Revenue Service ("IRS") disallowed most of this deduction, taking the position that only $ 16,656 of the Frists' interest expenses was deductible for regular tax purposes and that, therefore, only this amount was deductible in computing their alternative minimum tax liability. The IRS notified the Frists in October of 1986 that they owed additional tax, penalties, and interest for the 1985 tax year. This amount was paid by offset of a claimed tentative carryback for the 1981 tax year.
The "beef" in this case boils down to whether interest expense deductions under the alternative minimum tax provisions of the Code are subject to the same limitations as under the regular tax provisions. The deduction of interest expense for regular tax purposes is governed by 26 U.S.C. § 163, which in 1985 provided, in pertinent part, the following:
(a) General Rule.-- There shall be allowed as a deduction all interest paid or accrued within the taxable year on indebtedness.
(d) Limitation on Interest on Investment Indebtedness.--
(1) In general.-- In the case of a taxpayer other than a corporation, the amount of investment interest . . . otherwise allowable as a deduction under this chapter shall be limited, in the following order, to--
(A) $ 10,000 ($ 5,000, in the case of a separate return by a married individual), plus
(B) the amount of the net investment income . . . plus the amount (if any) by which the deductions allowable under this section . . . and sections 162, 164(a)(1) or (2), or 212 attributable to property of the taxpayer subject to a net lease exceeds the rental income produced by such property for the taxable year. . . .
(2) Carryover of disallowed investment interest.-- The amount of disallowed investment interest for any taxable year shall be treated as investment interest paid or accrued in the succeeding taxable year.
(A) Net investment income.-- The term "net investment income means the excess of investment income over ...