USCA11 Case: 22-10707 Document: 37-1 Date Filed: 05/30/2023 Page: 1 of 23
[PUBLISH] In the United States Court of Appeals For the Eleventh Circuit
____________________
No. 22-10707 ____________________
CARL L. GREGORY, LEILA GREGORY, Petitioners-Appellants, versus COMMISSIONER OF INTERNAL REVENUE,
Respondent-Appellee.
Petition for Review of a Decision of the U.S. Tax Court Agency No. 10336-18 ____________________ USCA11 Case: 22-10707 Document: 37-1 Date Filed: 05/30/2023 Page: 2 of 23
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Before WILSON, JORDAN, and BRASHER, Circuit Judges. BRASHER, Circuit Judge: This appeal is a tax dispute over a yacht. It raises an issue of first impression about whether hobby losses under Section 183(b)(2) of the Internal Revenue Code should be treated as mis- cellaneous itemized deductions. This treatment matters for many reasons, including because taxpayers (during the relevant time) could deduct miscellaneous itemized deductions only for amounts that exceeded two percent of their adjusted gross income. Carl and Leila Gregory chartered their yacht, Lady Leila, in 2014 and 2015. They did not conduct the chartering activity for profit—it was a hobby. Though the hobby generated income, it also incurred sizeable expenses each year. The Gregorys deducted some of those expenses under Section 183(b)(2) and placed them “above the line” to reduce their gross income. After an audit, the Commissioner determined that the Section 183(b)(2) deductions were miscellaneous itemized deductions under Section 67, mean- ing that they belonged “below the line” and reduced adjusted gross income, not gross income. Moreover, because the Gregorys had earned tens of millions of dollars in 2014 and 2015 and, at that time, the Code allowed miscellaneous itemized deductions only to the extent that they exceeded two percent of adjusted gross income, the Commissioner disallowed the Section 183(b)(2) deductions al- together. Facing deficiencies and penalties, the Gregorys petitioned USCA11 Case: 22-10707 Document: 37-1 Date Filed: 05/30/2023 Page: 3 of 23
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the Tax Court, which granted summary judgment for the Commis- sioner. They now seek appellate review. Everyone agrees that Section 183(b)(2) allows a deduction for a certain amount of hobby losses, which is capped at the hobby’s gross income. But we must decide where those deductions belong on a taxpayer’s return: above the line (reducing gross in- come) or below the line as miscellaneous itemized deductions (re- ducing adjusted gross income). We believe the provisions of the Internal Revenue Code, taken together, answer this question and hold that Section 183(b)(2) expenses are below-the-line miscellane- ous itemized deductions. We agree with the Tax Court and deny the petition for review. I.
We begin by reciting the relevant facts, which are not dis- puted. In 2011, the Gregorys formed CLC Ventures, Ltd., a Cay- man Islands corporation, to own and charter a yacht named Lady Leila. Because CLC elected for treatment as a disregarded entity, the Gregorys reported CLC’s income and expenses on their per- sonal returns. It is undisputed that CLC was not engaged in for profit within the meaning of I.R.C. § 183. The Gregorys filed joint tax returns for 2014 and 2015, re- porting CLC’s income and expenses on their Schedule C (Profit or Loss from Business). In March 2018, the Commissioner issued a Notice of Deficiency to the Gregorys for tax years 2014 and 2015. Because CLC lacked a profit motive, the Commissioner adjusted USCA11 Case: 22-10707 Document: 37-1 Date Filed: 05/30/2023 Page: 4 of 23
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the Gregorys’ returns, recharacterizing CLC’s income as “Other In- come” and its expenses as “Itemized Deductions” on the Gregorys’ Schedule A. The Commissioner further classified the itemized de- ductions as miscellaneous itemized deductions, meaning they were allowable only to the extent that they exceeded two percent of the Gregorys’ adjusted gross income under I.R.C. § 67(a). The Gregorys reported taxable income1 of $19,666,293 and $80,154,735 for 2014 and 2015, respectively, and the Commissioner disallowed all deductions attributable to CLC except for several hundred dollars of taxes and licensing expenses. The Commis- sioner then assessed over three hundred thousand dollars in defi- ciencies and penalties. The Gregorys petitioned the Tax Court to reconsider the de- ficiencies, arguing that hobby expenses under Section 183(b)(2) are not miscellaneous itemized deductions subject to the two-percent floor imposed by Section 67(a). The Tax Court disagreed, deter- mining that the Code’s plain language and statutory scheme con- firmed that Section 183(b)(2) grants a miscellaneous itemized de- duction. The Gregorys filed a motion for reconsideration, which the Tax Court denied. The Tax Court issued a final decision up- holding the deficiencies—$267,221 in total—but not the penalties.
1 The Gregorys’ adjusted gross income is not in the record. But all agree that it was too high to take a deduction for their hobby losses if those losses are treated as miscellaneous itemized deductions subject to Section 67’s two-per- cent floor. USCA11 Case: 22-10707 Document: 37-1 Date Filed: 05/30/2023 Page: 5 of 23
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The Gregorys timely appealed. II.
We review the Tax Court’s ruling on a summary judgment motion de novo. Roberts v. Comm’r, 329 F.3d 1224, 1227 (11th Cir. 2003). The Tax Court’s application of statutes and conclusions of law also receive de novo review. Peterson v. Comm’r, 827 F.3d 968, 986 (11th Cir. 2016). III.
A.
Before discussing the parties’ arguments, we explain the stat- utory scheme for above- and below-the-line income tax deduc- tions. To be clear, our background discussion of the relevant statu- tory scheme is meant to give context to the parties’ specific argu- ments. The Code has a byzantine character, and exceptions to the following generalizations may apply in certain circumstances. Income tax deductions reduce taxes owed by reducing the overall amount of income that is subject to a tax. The Code distin- guishes—albeit not explicitly—two principal classes of deductions: above-the-line and below-the-line. Above-the-line deductions re- duce gross income, that is, “all income from whatever source de- rived,” and are enumerated in Section 62(a). I.R.C. §§ 61(a), 62(a). Gross income minus above-the-line deductions equals adjusted gross income. Id. § 62. After calculating adjusted gross income, tax- payers can invoke another round of deductions to lower adjusted USCA11 Case: 22-10707 Document: 37-1 Date Filed: 05/30/2023 Page: 6 of 23
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gross income. See id. § 63(a). These deductions are commonly de- scribed as “below-the-line” because they occur after applying the Section 62 deductions to gross income. See Cole v. Comm’r, No. 14402-11S, 2013 WL 1798975, at *4 n.4 (T.C. Apr. 29, 2013) (describ- ing “below-the-line” deductions as “including itemized deductions and” the deductions listed in Section 63(b)). Most below-the-line deductions are “itemized” deductions and available only to taxpay- ers like the Gregorys who do not take the standard deduction. See id. § 63(b), (d), (e). Subtracting the below-the-line deductions from adjusted gross income yields taxable income. Id. § 63. The amount and type of deductions available to taxpayers “depend[] upon legislative grace.” See New Colonial Ice Co. v. Helver- ing, 292 U.S. 435, 440 (1934). Put differently, there is no general right to a deduction. And not all deductions are created equal. For instance, taxpayers can usually deduct the full amount of business expenses, but other kinds of expenses must rise above a statutory floor to trigger a deduction or may not be available to taxpayers whose income exceeds a certain threshold. Compare, e.g., I.R.C. § 162(a) (allowing an uncapped deduction for “all the ordinary and necessary expenses paid or incurred . . . in carrying on any trade or business”), with, e.g., id. § 213(a) (allowing a deduction for medical expenses “to the extent that such expenses exceed 7.5 percent of adjusted gross income”). Except for twelve deductions identified in Section 67(b), all itemized deductions are “miscellaneous itemized deductions.” Id. USCA11 Case: 22-10707 Document: 37-1 Date Filed: 05/30/2023 Page: 7 of 23
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§ 67(b). During the relevant time period, the law allowed a tax- payer to deduct miscellaneous itemized deductions “only to the ex- tent that the aggregate of such deductions exceed[ed] 2 percent of adjusted gross income.” Id. § 67(a). In other words, a taxpayer could deduct only the portion of miscellaneous itemized deduc- tions that surpassed two percent of the taxpayer’s adjusted gross income. See Ted D. Englebrecht et al., Trusts Face Limit on Invest- ment Advisory Fee Deduction, 77 Prac. Tax Strategies 92, 92 (2006) (“Section 67(a) limits an individual’s miscellaneous itemized deduc- tions to the amount that exceeds 2% of adjusted gross income.”); Fed. Tax Coordinator 2d (Res. Inst. Am.) ¶ A-1311 (Apr. 2023 up- date) (describing this principle); Job Search Expenses Can Be Tax De- ductible, I.R.S. (Aug. 4, 2012) (“The amount of your miscellaneous deduction that exceeds two percent of your adjusted gross income is deductible.”). This two-percent floor rendered miscellaneous itemized de- ductions of little value to most taxpayers. After the relevant time period here, Congress amended the Code to disallow all miscella- neous itemized deductions of whatever amount, rendering them of even less value. But this provision is set to sunset in 2025. I.R.C. § 67(g). B.
We now turn to the parties’ arguments. The Tax Court held that hobby losses under Section 183(b)(2) are miscellaneous item- ized deductions that are applied below the line and subject to the two-percent floor imposed by Section 67(a). Because the Gregorys’ USCA11 Case: 22-10707 Document: 37-1 Date Filed: 05/30/2023 Page: 8 of 23
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miscellaneous itemized deductions did not exceed two percent of their adjusted gross income, the Tax Court disallowed almost all their deductions attributable to Lady Leila. The Gregorys dispute this reasoning. They argue that Section 183(b)(2) creates an above- the-line deduction for income-producing hobbies. Accordingly, they contend that the Tax Court erred in classifying their hobby losses as miscellaneous itemized deductions subject to below-the- line treatment and to the two-percent floor under Section 67. We are not persuaded. The language of the relevant statutory provisions settles this question. See Mamani v. Berzain, 825 F.3d 1304, 1309 (11th Cir. 2016). We presume that the Internal Revenue Code “says . . . what it means and means . . . what it says.” See Conn. Nat’l Bank v. Ger- main, 503 U.S. 249, 254 (1992). We therefore begin our statutory interpretation with the words of the statutes themselves. Harris v. Garner, 216 F.3d 970, 972 (11th Cir. 2000) (en banc). Still, “[s]tatu- tory provisions are not written in isolation.” In re Shek, 947 F.3d 770, 776 (11th Cir. 2020). A provision’s meaning must consider both the “particular statutory language at issue” and “the language and design of the statute as a whole.” Id. at 777 (quoting K Mart Corp. v. Cartier, Inc., 486 U.S. 281, 291 (1988)). Three provisions of Section 183 are relevant. First, Section 183(a) prohibits all hobby loss deductions except for those allowa- ble in Section 183(b). I.R.C. § 183(a) (stating that, if an “activity en- gaged in by an individual or an S Corporation” is “not engaged in USCA11 Case: 22-10707 Document: 37-1 Date Filed: 05/30/2023 Page: 9 of 23
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for profit, no deduction attributable to such activity shall be al- lowed under this chapter except as provided in this section”). Sec- ond, Section 183(b)(1) grants activities not engaged in for profit (e.g., hobbies) the same deductions “allowable under this chap- ter . . . without regard to whether or not such activity is engaged in for profit.” Id. § 183(b)(1). Third, and this is the disputed provision, Section 183(b)(2) allows “a deduction equal to the amount of de- ductions . . . allowable under this chapter . . . only if such activity were engaged in for profit.” Id. § 183(b)(2). But the amount of this deduction cannot exceed the difference between the hobby’s gross income and the deductions allowed under Section 183(b)(1). See id. Thus, the law caps a Section 183(b)(2) deduction at the amount of the hobby’s “gross income” minus the deductions claimed under Section 183(b)(1). Everyone agrees that Section 183(b)(2) allows the Gregorys a potential deduction for their hobby losses from chartering Lady Leila because they could deduct those losses “if such activity were engaged in for profit.” Id. Everyone also agrees that the amount of that deduction is capped at the hobby’s gross income less the de- ductions taken under Section 183(b)(1). Id. § 183(b)(1)–(2). But how should Section 183(b)(2)’s deduction be treated? Is it an above- or below-the line deduction? If the latter, is it a miscellaneous item- ized deduction subject to the two-percent floor? Section 183 does not expressly answer these questions. In this respect, Section 183(b)(2) resembles many other Code provi- sions that identify an allowable deduction but do not account for USCA11 Case: 22-10707 Document: 37-1 Date Filed: 05/30/2023 Page: 10 of 23
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that deduction’s placement above or below the line. For example, Section 162(a) allows a deduction for trade and business expenses. But, to find out how to treat that deduction, we must look at Sec- tion 62, which provides that deductions for trade and business ex- penses reduce the taxpayer’s gross income and therefore belong above the line. See id. § 62(a)(1). Likewise, many other deductions are granted in one Code section, but limited, capped, or circum- scribed in other sections. See, e.g., id. § 161 (allowing itemized de- ductions for individuals and corporations); id. § 262(a) (disallowing itemized deductions for “personal, living, or family expenses”); id. § 68 (phasing out itemized deductions when the taxpayer’s “ad- justed gross income exceeds” a certain amount). Section 183 fits this pattern; it provides a deduction, but other sections tell taxpay- ers whether and how they may benefit from it. For their part, the Gregorys resist this reasoning and argue that, unlike other Code provisions, Section 183(b)(2) does say how the deduction should be treated. Specifically, they assert Section 183(b)(2) creates an above-the-line deduction that is not subject to the two-percent floor. The Gregorys make two text-based argu- ments in support of this reading, but neither is persuasive. First, the Gregorys argue that Section 183(b)(2) does not confer a specific deduction but a deduction framework. That frame- work, as the argument goes, requires us to treat Section 183(b)(2) expenses the same as business expenses in all respects. The Grego- rys contend that, because Section 183(b)(2) waives the for-profit re- quirement for other deductions in Chapter 1 of the Code, Section USCA11 Case: 22-10707 Document: 37-1 Date Filed: 05/30/2023 Page: 11 of 23
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183(b)(2) deductions receive the same placement as trade and busi- ness deductions on a taxpayer’s return. If the Gregorys had con- ducted their chartering activities for profit, they could have de- ducted trade and business expenses from Lady Leila under Section 162 and placed that deduction above the line under Section 62(a). See Est. of Sherrod v. Comm’r, 774 F.2d 1057, 1064 (11th Cir. 1985) (“Section 162 permits the deduction of business expenses in arriv- ing at adjusted gross income . . . .”) (emphasis added). They therefore conclude that their Section 183(b)(2) expenses attributable to Lady Leila are deductible above the line just as if they were trade or busi- ness expenses. The text does not support the Gregorys’ argument that Sec- tion 183(b)(2)’s deduction must be given the same priority and placement as a trade or business expense. Section 183(b)(2) grants “a deduction equal to the amount of the deductions” allowable for activities engaged in for profit. I.R.C. § 183(b)(2). Despite referring to business activities to set the deduction “amount,” in no other respect does Section 183(b)(2) instruct us to treat that deduction the same as a business expense. Amount is not kind. Compare Amount, Oxford English Dictionary (online ed. Dec. 2022) (defining “amount” as “[a] quantity of something; a portion or measure) (em- phasis added) with Kind, id. (defining “kind” as “[a] class or category of things distinguished by common characteristics” or “a particular variety or type”) (emphasis added). And, of course, even the “amount” of the hobby loss deduction under Section 183 is differ- ent from the amount of a comparable deduction available to a for- profit business because the Section 183 deduction is capped at the USCA11 Case: 22-10707 Document: 37-1 Date Filed: 05/30/2023 Page: 12 of 23
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hobby’s income. See I.R.C. § 183(b)(2). In short, Section 183(b)(2) permits a deduction otherwise disallowed by Section 183(a) and identifies its amount. But the deduction allowed by Section 183(b)(2) is its own thing, not a trade or business expense. Second, the Gregorys argue that, because Section 183(b)(2) caps the deduction amount at the hobby’s gross income minus the Section 183(b)(1) deductions, we can surmise that Section 183(b)(2) expenses are supposed to reduce a taxpayer’s gross income—not the taxpayer’s adjusted gross income—and therefore belong above the line. That argument also misses the mark. The Section 183(b)(2) cap is based on the hobby’s gross income; above-the-line deductions reduce an individual’s overall gross income from whatever source. These are two very different things. Section 183(b)(2) limits deduct- ible hobby losses “to the extent that the gross income derived from such activity [i.e., the hobby] . . . exceeds the deductions allowable by [Section 183(b)(1)].” Id. § 183(b)(2) (emphasis added). The Code defines “gross income” as “all income from whatever source de- rived.” Id. § 61(a). The “gross income derived from [the hobby],” id. § 183(b)(2), therefore means all income from the hobby, not the taxpayer’s total gross income. The Tax Court correctly concluded that Section 183(b)(2)’s reference to “gross income” merely con- cerns the maximum allowable deduction amount under Section 183(b)(2). It is a benchmark for capping the deduction—it is not a command to apply hobby loss deductions against a taxpayer’s total gross income. USCA11 Case: 22-10707 Document: 37-1 Date Filed: 05/30/2023 Page: 13 of 23
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Because the text of Section 183 does not tell us how to treat the hobby loss deduction it provides, we must turn to other provi- sions of the Code to answer that question. See Hagans v. Comm’r of Soc. Sec., 694 F.3d 287, 296 (3d Cir. 2012) (“When a statute is ‘com- plex and contains many interrelated provisions,’ it may be ‘impos- sible to attach a plain meaning to provisions in isolation.’” (quoting Cleary ex rel. Cleary v. Waldman, 167 F.3d 801, 807 (3d Cir. 1999))). Those provisions are Section 62, Section 63, and Section 67. As ex- plained below, those provisions establish that Section 183(b)(2) de- ductions are below-the-line and must exceed two percent of a tax- payer’s adjusted gross income before they become deductible. We will walk through each provision in turn. We start with Section 62, which lists all above-the-line de- ductions that reduce gross income. See I.R.C. § 62(a) (describing over a dozen above-the-line deductions). These deductions include trade and business expenses, id. § 62(a)(1), “losses from the sale or exchange of property,” id. § 62(a)(3), and certain attorney’s fees, id. § 62(a)(21). The list of above-the-line deductions in Section 62(a) is exhaustive. Nothing in Section 62’s text suggests that Congress hid other above-the-line deductions elsewhere in the Code. See id. § 62. And Section 62 nowhere mentions Section 183 or hobby expenses within its comprehensive list of above-the-line deductions. See id. § 62(a)(1)–(21); Antonin Scalia & Bryan A. Garner, Reading Law: The Interpretation of Legal Texts 93 (2012) (observing that courts should not “elaborate unprovided-for exceptions to a text”); EEOC v. Aber- crombie & Fitch Stores, Inc., 575 U.S. 768, 774 (2015) (“We construe USCA11 Case: 22-10707 Document: 37-1 Date Filed: 05/30/2023 Page: 14 of 23
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. . . [a statute’s] silence as exactly that: silence.”). Accordingly, Sec- tion 183 deductions are not above-the-line. Next, we move to Section 63. Section 63(d) defines “item- ized deductions” as all deductions except (1) the above-the-line de- ductions listed in Section 62 and (2) “any deduction referred to in any paragraph of subsection (b) [of Section 63].” Id. § 63(d). For its part, Section 63(b) lists four deductions: the standard deduction, the personal exemption deduction under Section 151, the qualified business income deduction under Section 199A, and the charitable contribution deduction under Section 170(p). Id. § 63(b). Again, Section 183 is nowhere to be found. The Section 183 deduction must therefore be an “itemized deduction.” Lastly, we come to Section 67. Section 67(a) imposes the two-percent floor on “miscellaneous itemized deductions.” Id. § 67(a). In Section 67(b), the statute defines “miscellaneous itemized deductions” as all “itemized deductions” other than twelve specific listed deductions, none of which mentions hobby expenses or Sec- tion 183. See id. § 67(a)–(b). Thus, Section 183(b)(2) expenses are miscellaneous itemized deductions and deductible “only to the ex- tent that the aggregate of such deductions exceeds 2 percent of ad- justed gross income.” Id. § 67(a). We note that our reading of these statutes is consistent with other courts and IRS regulations. Although none of our sister cir- cuits has addressed the Gregorys’ arguments, several lower courts have reached the same conclusion we do here. See, e.g., Purdey v. United States, 39 Fed. Cl. 413, 417 (1997) (concluding that Section USCA11 Case: 22-10707 Document: 37-1 Date Filed: 05/30/2023 Page: 15 of 23
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183(b)(2) deductions are miscellaneous itemized deductions be- cause Section 67(b) does not exclude them); Strode v. Comm’r, 109 T.C.M. (CCH) 1599, 2015 WL 3897787, at *11 n.12 (2015) (same). Likewise, the IRS provides by regulation that “expenses that . . . are subject to the 2-percent floor include . . . [e]xpenses for an activity for which a deduction is otherwise allowable under section 183.” 26 C.F.R. § 1.67-1T(a)(1). Tax analysts and commentators also agree that “expenses of an activity not carried on for profit are” one of “the principal cate- gories of miscellaneous itemized deductions.” B. Bittker & L. Lokken, Federal Taxation of Income, Estates and Gifts ¶ 30.4.2 (July 2022). Leading tax treatises inform tax practitioners that “[d]educ- tions for hobby activities are claimed as itemized deductions on Schedule A” and “[e]xpenses . . . allowed under the hobby loss rules are ‘miscellaneous itemized deductions.’” Fed. Tax Coordinator 2d (Res. Inst. Am.) ¶ M-5804 (Apr. 2023 update); see also 1 Richard D. Blau et al., S Corporations Federal Taxation § 7:29 (Nov. 2022 update) (same); 33 Am. Jur. 2d Federal Taxation ¶ 1153 (May 2023 update) (same); 1 Edward F. Koren, Estate, Tax and Personal Financial Plan- ning § 4:10 n.15 (Mar. 2023 update) (same). Put another way, Sec- tion 183(b)(2) deductions “must be taken as miscellaneous itemized deductions subject to the 2%-of-AGI (adjusted gross income) re- duction (Section 67).” Donald Samelson, The Income Tax Aspects of Artistic Activities, 93 Prac. Tax Strategies 244, 244 (2014). In summary, the Tax Court correctly calculated the Grego- rys’ tax liability. Section 183(b)(2) allows a deduction for hobby USCA11 Case: 22-10707 Document: 37-1 Date Filed: 05/30/2023 Page: 16 of 23
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losses but does not say whether it belongs above or below the line. Section 62, however, places that deduction below the line. Because Sections 63 and 67 also omit Section 183, hobby expenses deducted under Section 183(b)(2) are miscellaneous itemized deductions. During the relevant time period, these deductions were subject to a two-percent floor on adjusted gross income. The result is that Section 183(b)(2) gave the Gregorys a deduction for their expenses from operating Lady Leila, but Section 67 did not allow them to take that deduction because they could not meet the two-percent threshold for miscellaneous itemized deductions. C.
In response to this plain-text analysis, the Gregorys make five additional arguments. None is persuasive. First, the Gregorys argue that we “recognized the connec- tion between Section 183 deductions and the analogous adjust- ments under Section 162” in Brannen v. Commissioner, 722 F.2d 695 (11th Cir. 1984). In Brannen, taxpayer-Brannen invested in a limited partnership to purchase a “spaghetti western” film to distribute in the United States. Brannen, 722 F.2d at 697–700. The film flopped, and the Commissioner disallowed certain losses claimed by Bran- nen “because the purchase and subsequent distribution of the movie [by the limited partnership] was an activity ‘not engaged in for profit.’” Id. at 701. In affirming the Tax Court, we stated that “Section 183 takes effect only when the taxpayer is engaged in an activity . . . not otherwise entitled to claimed deductions under Sec- tions 162 or 212.” Id. at 704. Thus, in assessing profit motive, “we USCA11 Case: 22-10707 Document: 37-1 Date Filed: 05/30/2023 Page: 17 of 23
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must first determine whether the taxpayer was entitled to deduc- tions under Section 162.” Id. After deciding that the partnership was not “entered into with the dominant hope and intent of realiz- ing a profit” and therefore not eligible for Section 162 deductions, we held that the partnership could take deductions for “cash paid for the movie, to the extent of the gross income derived from the activity” under Section 183(b)(2). Id. at 704, 706. Brannen correctly describes the relationship between Section 162 and Section 183(b)(2) in determining profit motive. Though we held that Brannen could deduct certain expenses to the extent of gross income derived from the partnership under Section 183(b)(2), we did not opine on the placement of those deductions or whether hobby losses belong above or below the line. Moreover, Congress did not enact Section 67, which imposed the two-percent floor on miscellaneous itemized deductions, until 1986, a couple of years af- ter this Court decided Brannen. See Tax Reform Act of 1986, Pub. L. No. 99-514, 100 Stat. 2085, 2113–14. Accordingly, Brannen does not stand for the proposition that Section 183(b)(2) confers an above-the-line deduction, and the Gregorys’ reliance on it is mis- placed. Second, the Gregorys contend that our interpretation of Sec- tion 183(b)(2) contravenes congressional intent. They point to leg- islative history, arguing that Congress enacted Section 183 to pre- vent wealthy taxpayers from generating artificial losses, not to pre- USCA11 Case: 22-10707 Document: 37-1 Date Filed: 05/30/2023 Page: 18 of 23
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vent taxpayers from deducting legitimate hobby expenses. This in- tent explains, for example, why Congress capped the Section 183(b)(2) deduction. This argument misses the point. The Gregorys have a de- duction for their hobby losses under Section 183—just as Congress intended. But they cannot benefit from that deduction because an- other Code provision, Section 67, requires that—to actually take a deduction for a miscellaneous itemized deduction such as the one for hobby losses—“the aggregate of such deductions [must] ex- ceed[] 2 percent of adjusted gross income.” I.R.C. § 67(a). When Congress enacted Section 67, it affected taxpayers’ ability to benefit from the already-existing deductions that the Code provided. Con- gress has revealed its intent, and “we must give effect to” it. Miller v. French, 530 U.S. 327, 336 (2000) (quoting Sinclair Refin. Co. v. At- kinson, 370 U.S. 195, 215 (1962)); see also Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837, 842–43 (1984) (holding that courts “must give effect to the unambiguously expressed intent of Congress”). Third, the Gregorys urge us to resolve any statutory ambi- guity in their favor because “ambiguous tax statutes are to be con- strued against the government and in favor of the taxpayer.” Royal Caribbean Cruises, Ltd. v. United States, 108 F.3d 290, 294 (11th Cir. 1997). But there is no ambiguity in the tax statutes at issue here. See generally Kisor v. Wilkie, 139 S. Ct. 2400, 2415 (2019) (explaining that a provision is “genuinely ambiguous” only when, after a court has USCA11 Case: 22-10707 Document: 37-1 Date Filed: 05/30/2023 Page: 19 of 23
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exhausted “all the ‘traditional tools’ of construction,” an “interpre- tive question still has no single right answer” (quoting Chevron, 467 U.S. at 843 n.9)). As explained above, a straightforward reading of Section 62, Section 63, and Section 67 establishes that the deduction provided in Section 183(b)(2) is a below-the-line miscellaneous itemized deduction. Fourth, citing the canon against implied repeals, the Grego- rys posit that our reading of Section 62, Section 63, and Section 67 implicitly repeals Section 183(b)(2). See, e.g., Posadas v. Nat’l City Bank of N.Y., 296 U.S. 497, 503 (1936) (describing repeal by implica- tion). Not so. This case does not implicate the presumption against implied repeal because we can read the relevant Code sections har- moniously. Section 183(b)(2) grants a deduction for certain hobby expenses; Sections 62 and 63 place that deduction below the line as an itemized deduction; Section 67 renders it a miscellaneous item- ized deduction subject to the two-percent floor. Because our read- ing of Sections 62, 63, and 67 does not contravene or undermine Section 183(b)(2), the presumption against implied repeal—and im- plied amendment—are inapposite. Fifth, the Gregorys argue that our reading would lead to an odd or absurd result. A court may “disregard[] or judicially cor- rect[]” a statutory provision “if failing to do so would result in a disposition that no reasonable person could approve.” Scalia & Garner, supra, at 234 (alteration omitted). When “the literal reading of a statutory” provision compels an odd or absurd result, “we must search for other evidence” to avoid that result. Pine v. City of USCA11 Case: 22-10707 Document: 37-1 Date Filed: 05/30/2023 Page: 20 of 23
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West Palm Beach, 762 F.3d 1262, 1272 (11th Cir. 2014) (quoting Pub. Citizen v. U.S. Dep’t of Just., 491 U.S. 440, 454 (1989)). But courts should invoke the absurdity doctrine only when “the absurdity is ‘so gross as to shock the general moral or common sense.’” Packard v. Comm’r, 746 F.3d 1219, 1222 (11th Cir. 2014) (quoting Crooks v. Harrelson, 282 U.S. 55, 60 (1930)). The Gregorys contend that applying Section 67’s two-per- cent floor to deductions under Section 183(b)(2) creates an absurd result because a taxpayer will need either a very low income or very large hobby losses (and hobby income) to benefit from the deduction. We disagree. This consequence may be unfavorable for the Gregorys, but it is not absurd. The absurdity doctrine should “correct obviously unintended dispositions, not . . . revise purpose- ful dispositions.” Scalia & Garner, supra, at 239. Here, Congress de- liberately devised the complained-of result by imposing the two- percent floor on miscellaneous itemized deductions. Congress can cap or reduce taxpayer eligibility for a tax deduction if it wants, and, here, it elected to do so. IV.
The petition is DENIED. USCA11 Case: 22-10707 Document: 37-1 Date Filed: 05/30/2023 Page: 21 of 23
1 WILSON, J., Concurring 22-10707
WILSON, Circuit Judge, concurring: I agree with the majority’s holding that hobby expenses un- der Section 183(b)(2) of the Internal Revenue Code are below-the- line miscellaneous itemized deductions, but I would reach this con- clusion differently. In my view, the plain language of Section 183(b)(2) is ambiguous. Thus, I would look to Congress’ intent to determine whether Section 183(b)(2) expenses are to be deducted above the line (reducing gross income) or below the line as miscel- laneous itemized deductions (reducing adjusted gross income (AGI)). The majority concludes that the plain language of the rele- vant statutory provisions—namely, Sections 183, 62, 63, and 67— settles the question of whether Section 183(b)(2) creates an above- the-line deduction for income-producing hobbies. Maj. Op. at 8, 13–16. As the majority correctly notes “the text of Section 183 does not tell us how to treat the hobby loss deduction it provides.” Maj. Op. at 13. But rather than turn to other Code provisions to deduce the meaning of Section 183, I would look to congressional intent for guidance. We look beyond a statute’s plain language to extrin- sic materials to determine congressional intent if the statute’s lan- guage is ambiguous. United States v. DBB, Inc., 180 F.3d 1277, 1281 (11th Cir. 1999). “A word or phrase is ambiguous when the ques- tion is which of two or more meanings applies.” Antonin Scalia & Bryan A. Garner, Reading Law: The Interpretation of Legal Texts 32 USCA11 Case: 22-10707 Document: 37-1 Date Filed: 05/30/2023 Page: 22 of 23
2 WILSON, J., Concurring 22-10707
(2012). Our function as the judiciary “in construing a statute is lim- ited to ascertaining the intention of the Legislature therein ex- pressed.” Ebert v. Poston, 266 U.S. 548, 554 (1925). Here, the language of Section 183(b)(2) is ambiguous be- cause it creates a question of “which of two or more meanings ap- plies.” Scalia & Garner, supra. For hobbies not engaged in for profit, Section 183(b)(2) permits a deduction equal to the amount of the deductions which would be allowable . . . only if such activity were engaged in for profit, but only to the extent that the gross income derived from such activity . . . ex- ceeds the deductions allowable by reason of [Section 183(b)(1)].
Under the Commissioner’s interpretation of this provision, hobby expenses are miscellaneous itemized deductions subject to Section 67’s two-percent floor and are deductible below the line against AGI. Under the Gregorys’ interpretation, hobby expenses are akin to business expenses and thus can be deducted above the line against gross income. Yet, on its face, Section 183(b)(2) simply does not tell us whether hobby expenses are miscellaneous itemized de- ductions or if they may be treated as business expenses. Indeed, based on a facial reading of the plain text, either interpretation seems plausible. Given the ambiguity in the statutory language, we can—and should—look to extrinsic materials to ascertain how Congress intended hobby expenses to be treated under the tax code. See DBB, Inc., 180 F.3d at 1281. USCA11 Case: 22-10707 Document: 37-1 Date Filed: 05/30/2023 Page: 23 of 23
22-10707 WILSON, J., Concurring 3
Fortunately, the legislative history quickly clears up any am- biguity. Specifically, the December 2017 conference report for the Tax Cuts and Jobs Act 1 confirms that hobby expenses are below- the-line miscellaneous itemized deductions that are deductible against AGI and subject to Section 67’s two-percent floor. The con- ference report repealed certain miscellaneous itemized deductions subject to Section 67’s two-percent floor for taxable years begin- ning after December 31, 2017. See H.R. REP. NO. 115-466, at 273, 276 (2017) (Conf. Rep.). The report provides a non-exhaustive list of items that, under then-present law, were deductible under Sec- tion 67 provided they exceeded two percent of the taxpayer’s AGI. Id. at 273–74. Among the list of examples were “[h]obby expenses, but generally not more than hobby income.” Id. at 274. Thus, the conference report confirms that during the relevant time in this case—tax years 2014 and 2015—Congress indeed intended hobby expenses to be treated as miscellaneous itemized deductions sub- ject to Section 67’s two-percent floor. Like the majority, I would deny the petition.
1 Pub. L. No. 115-97, § 11045, 131 Stat. 2054 (2017).