 Compare the following two sentences:
Number 1 – the actual text of §163(a) – suffers from the same awkward and convoluted wording of many tax code sentences. The second sentence employs a clear, “subject, verb, predicate” structure that a reader can quickly grasp. While the second sentence is editorially preferable, we’re stuck with the first sentence. The statute’s first four words follow a pattern similar to §162 – a dummy subject followed by a verb phrase where “shall” is substituted for “will,” to indicate future tense. The verb “allow” means, “to let someone … do something.”[1] The complete impact of the first four words is that the government is granting taxpayers permission to do something. Ideally, the next five words would clearly tell the taxpayer what that is. Instead, the next five words (“as a deduction all interest”) are awkward. The drafters want to say, “all interest is allowed as a deduction.” Unfortunately, the prepositional phrase which tells is in what capacity we can treat interest[2] comes before the noun, creating an awkward phrasing that requires several readings to fully understand. “As a deduction” tells how we can treat “all interest.” The statute allows the taxpayer to deduct two types of interest: paid and accrued. Pay means, “to give (money) in exchange for goods or services.”[3] Its past tense is “paid.” This verb invokes the cash method of accounting, which allows a taxpayer to deduct an item, “for the taxable year in which actually made.”[4] Accrued is the past tense of accrue; it is an accounting term of art, which the Treasury Regulations define as, Generally, under an accrual method, income is to be included for the taxable year when all the events have occurred that fix the right to receive the income and the amount of the income can be determined with reasonable accuracy.[5] The payment (whether paid of accrued) must occur “within the taxable year.” "Within" is a preposition which means, “Inside the range of.”[6] The code defines a “taxable year,” as “… the calendar year, or the fiscal year ending during such calendar year, upon the basis of which the taxable income is computed under subtitle A.”[7] The preposition “on” has numerous meanings. It’s use in the phrase “on indebtedness” connotes, “used to indicates a source or basis.”[8] There are several ways to defines indebtedness. I like the definition contained in UCC §3-104(a): “an unconditional promise or order to pay fixed amount of money, with or without interest or other charges described in the promise or order.” While this is the definition of a check, it has the same elements as a debt and is a well-written sentence. [1] Concise Oxford English Dictionary, © 2004, p. 36 [2] Merriam-Webster Online Dictionary (https://www.merriam-webster.com/dictionary/as), last visited on February 13 (as means, “in the capacity, character, condition, or role of.”) [3] The American Heritage Dictionary, Second College Edition © 1985, p. 911 [4] Treas. Reg. 1.446-1(c)(ii) [5] Id; see also 1.446-2 Method of Accounting for Interest [6] Oxford at 1657 [7] 26 U.S.C. §7701(a)(23) [8] American Heritage at 867  In my last post on business deductions, I argued that the statutory language of §162 allows taxpayers to deduct a wide range of business expenditures. The Treasury Regulations support that analysis, largely due to a verb and preposition contained in the opening paragraph of the accompanying regulations.
“Include,” is a transitive verb that means, “to … comprise as a part of a whole or group.”[1] The verb’s object is a member of a larger category of items. For example, “The complete list of Hall of Fame Baseball players incudes Joe DiMaggio.” The verb’s object (Joe DiMaggio) is a member of a larger group (all the members of the Baseball Hall of Fame). The opening paragraph of the §162 Treasury Regulations states, “Business expenses deductible from gross income include the ordinary and necessary expenditures directly connected with or pertaining to the taxpayer's trade or business…”[2] This sentence is clear: the large number of deductions allowed thanks to the adjectives, “ordinary” and “necessary” are part of an even larger group of allowed expenses. The preposition “among” means, “Being a member of members of a larger set.”[3] The preposition’s object (which is usually the word, clause of phrase immediately after the preposition) is part of larger group. The opening paragraph of the accompanying regulations contain the following sentence: Among the items included in business expenses are management expenses, commissions), … labor, supplies, incidental repairs, operating expenses of automobiles used in the trade or business, traveling expenses while away from home solely in the pursuit of a trade or business (see § 1.162-2), advertising and other selling expenses, together with insurance premiums against fire, storm, theft, accident, or other similar losses in the case of a business, and rental for the use of business property. This is a fairly broad list of potential deductions, covering most of the major expenses taken by a business. The preposition “among” means that this list is non-exhaustive – it is part of a larger number of potential deductions. Finally, the Treasury Regulations contain 35 specific entries that explain a number of specific deductions. This is the final piece of evidence supporting the contention that the tax laws grant the taxpayer broad discretion to deduction expenses incurred in the production of income. [1] Merriam-Webster online dictionary, https://www.merriam-webster.com/dictionary/include, last visited on February 11, 2019. [2] Treas. Reg. 1.162-1(a) [3] The Concise Oxford English Dictionary, © 2004, p. 43  §162 grants taxpayers the right to deduct ordinary and necessary business expenses. 162’s text, however, requires us to open a few reference books to completely understand its statutory intent. Here’s the section’s opening sentence:
The word “there” has several grammatical functions; here, it’s used as a pronoun to, “introduce a clause or a sentence.”[1] A more precise definition is to describe it as a, “dummy subject” used to, “assert existence” or “introduce a topic.”[2] The sentence contains the verbal phrase, “shall be allowed.” Shall is a used as a substitute for “will,” a common scheme used in legal writing.[3] “Will” is an auxiliary verb signifying the future tense while “allow” means, “To let do or happen.”[4] This phrase grants the taxpayer permission to deduct “ordinary and necessary expenses.” An “ordinary” expense is “common,”[5] “normal, or usual,”[6] while a “necessary” expense is, “required to be done”[7] or “needed.”[8]The former implies temporal regularity while the latter connotes an unavoidable disbursement. The combined effect of these two adjectives is to grant the taxpayer broad authority regarding deductions.There are few standard or extraordinary expenses a skillful lawyer couldn’t argue weren’t described by either adjective – an interpretation supported by the Treasury Regulations: Business expenses deductible from gross income include the ordinary and necessary expenditures directly connected with or pertaining to the taxpayer's trade or business, except items which are used as the basis for a deduction or a credit under provisions of law other than section 162. The cost of goods purchased for resale, with proper adjustment for opening and closing inventories, is deducted from gross sales in computing gross income. See paragraph (a) of § 1.161-3. Among the items included in business expenses are management expenses, commissions (but see section 263 and the regulations thereunder), labor, supplies, incidental repairs, operating expenses of automobiles used in the trade or business, traveling expenses while away from home solely in the pursuit of a trade or business (see § 1.162-2), advertising and other selling expenses, together with insurance premiums against fire, storm, theft, accident, or other similar losses in the case of a business, and rental for the use of business property.[9] [1] American Heritage Dictionary, 2nd College Edition, p. 1261, © 1985 [2] The Merriam Webster Dictionary of English Usage, p. 899, © 1989 [3] The Chicago Manual of Style, 16th Edition, p. 237, © 2010 [4] American Heritage at 96. [5] American Heritage, p. 875 [6] Concise Oxford English Dictionary 11th Edition, p. 1007, © 2004 [7] Oxford at 956 [8] American Heritage at 834 [9] Treas. Reg. 1.162-1(a) |
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