*1 BANK v. HILLSBORO NATIONAL COMMISSIONER OF INTERNAL REVENUE Argued No. 81-485. November 1982 Decided March 1983* *Together Inc., with No. Dairy, United States v. Bliss on cer- tiorari to the United Appeals States Court of for the Ninth Circuit.
O’Connor, J., Burger, Court, opinion delivered in which J., White, Powell, Rehnquist, JJ., I, in joined, C. and Parts and and Brennan, Brennan, II, opinion J., joined. J., and IV of which an filed Stevens, J., in concurring part 403. filed dissenting part, post, p. and opinion part, an concurring judgment part dissenting Marshall, Blackmun, J., J., joined, which a dissent- post, p. 403. filed ing opinion, post, p. 422. petitioner argued
Harvey Stephens the cause for No. B. Ferguson H. Mark him on the briefs were 81-485. With A. Robert Stuart. argued re- the cause and filed a brief for
James Silhasek spondent in 81-930. No. argued the cause for the United Lee
Solicitor General respondent in 81-485. 81-930 and No. With States No. Attorney Archer, Assistant General him on the briefs were GaryR. Jay W. and David I. Allen, Miller, A. Smith, Stuart Pincus.† of the Court. opinion delivered
Justice O’Connor present question ap- cases These consolidated corporate plicability the tax benefit rule to two situa- *3 repayment for to the shareholders of taxes which tions: they originally paid by corpora- were liable but that were expensed corporate in a and the distribution of assets tion; nonrecognition pro- liquidation. that, We conclude unless a prevents it, vision of the Internal Revenue Code the tax ordinarily applies require the inclusion of benefit rule fundamentally income when events occur that are inconsist- provi- ent with an earlier deduction. Our examination of the granting governing liquidation sions the deductions and requires in these cases leads us to hold that the rule the rec- ognition liquidation in in of income the case of the but not case of the tax refund.
I In No. Hillsboro v. Commissioner, National Bank petitioner, incorporated Hillsboro Bank, National is an doing imposed bank business Illinois 1970, Illinois. Until property incorporated tax on Ill. shares held banks. (1971). §557 required Rev. Stat., ch. to retain 120, Banks, earnings customarily paid sufficient to taxes, 558, cover the of amici curiae by † Briefs urging were filed affirmance No. 81-930 R. A. Jack White and Steven W. Bacon Arthur Ameron, Inc.; by for Armstrong, pro se.
373 164(e) for the Under taxes shareholders. of the Inter- §164(e),1 1954, nal Revenue Code of U. S. C. bank tax, allowed a deduction for the amount of the but the share- not. In 1970, holders were Illinois amended its Constitution prohibit personal property ad valorem taxation of owned challenged individuals, and the amendment was as a viola- Equal tion of the Protection Clause of the Federal Constitu- tion. The Illinois courts held the amendment unconstitu- tional in Lake Auto Parts Co. Korzen, Shore 49 Ill. 2d (1971). granted E. 273 N. 2d We certiorari, 405 S.U. disposition pending and, here, of the case Illinois providing disputed enacted a statute for the collection the placement receipts taxes and the escrow. Ill. Rev. ¶ paid Stat., ch. 676.01 Hillsboro the taxes taking permitted by its shareholders deduction §164(e), placed receipts and the authorities in escrow. upheld This Court state constitutional amendment Lehnhausen v. Lake Shore Auto Parts Co., 410 U. S. (1973). Accordingly, County in 1973the Treasurer refunded the amounts in escrow that were attributable to shares held along individuals, with accrued interest. The Illinois belonged courts held that the refunds to the shareholders Arling- rather than to the banks. See Bank & Trust Co. Heights App. ton Cullerton, Ill. 3d E. 721, 726, N. *4 164(e) provides: Section corporation pays “Where a imposed a tax on a shareholder on his interest shareholder, aas and where the shareholder cor- does not reimburse the poration, then— “(1) (a) the deduction allowed shall to cor- subsection be allowed the poration; and
“(2) no deduction shall be allowed the shareholder
for such tax.”
(a) provides,
part:
Subsection
“Except
provided
section,
as otherwise
following
this
the
taxes shall be
a
allowed as
deduction
the
year
paid
for
taxable
within which
or accrued:
“(2) State and local personal property taxes.”
Lincoln National Bank
(alternative
(1975)
29,
holding);
2d
Cullerton,
(1974).
953,
18 Ill.
spondent, Dairy, Inc., was held closely corporation in the business of As a cash engaged operating dairy. basis taxpayer, 30, 1973, taxable June de- year ending ducted the full cost of cattle feed upon purchase pur- chased for use its 162 of operations, permitted Internal Revenue A Code, 26 U. S. C. 162.3 substantial portion of the feed still on hand at the end of taxable year. 2, 1973, On two into taxable July days year, the next Bliss and, month adopted plan liquidation, during July, it distributed its assets, cattle including remaining feed, to the on Relying §336, shareholders. which shields from corporation recognition on distribu- gain
2Although us, the returns of the shareholders of are not before the bank explained they required Commissioner recognize were re 1981) (CA7 (Pell, fund as J., income. See 641 n. F. 2d dissenting). 162(a) provides Section part: in relevant necessary
“There ordinary shall be allowed as a all the deduction ex- penses paid or incurred during carrying the taxable trade or business . . . *5 property liquidation,4
tion of to its shareholders on Bliss re- ported no income on the transaction. The shareholders con- operate dairy noncorporate tinued to business form. They gain recognized filed an election under 333 to limit the by liquidation,5 they them on the and therefore calculated pro-' their basis in the assets received the distribution as provides: Section 336 (b) “Except provided in subsection of this section and section 453B (relating disposition obligations), gain of installment no or loss shall be recognized corporation property on the distribution of in partial or (1976 V). complete liquidation.” ed., §336 Supp. 26 U. S. C. provides, Section part: relevant “(a) property complete the case of distributed in liquidation of a domes- , corporation tic . if—. .
“(1) liquidation in pursuance plan is made liquidation of a adopted, and “(2) complete the distribution is in cancellation redemption or of all the stock, property and the transfer of all the under the liquidation occurs month, within some one calendar
“then in qualified the case of each electing gain shareholder . . . on the by shares him owned at the time of adoption plan liquidation recognized only (e) (f). shall be provided to the extent in subsections and “(e) In the qualified electing case of a corpora- shareholder other than a tion— “(1) there recognized, shall be dividend, and treated as a so much of the
gain as is not in excess of his ratable share of earnings profits and corporation accumulated February 28,1913, after such earnings profits and to be determined as of the close of the month in which liqui- the transfer in dation occurred under (a)(2), subsection but by without diminution reason during distributions made month; such by including but computa- tion .thereof all up amounts accrued to the date on which the transfer of all property under the liquidation completed; “(2) there recognized, shall be and treated as short-term long-term or capital gain, may be, as the case so much of the gain remainder of the as is excess by of the amount which portion the value of that of the assets received him which money, consists of or of stock or acquired securities corporation after December exceeds his ratable share of earnings profits.” such *6 376 334(c).6 provision, in the § their basis that Under
vided
corpora
liquidated
in the
in their stock
their basis
assets was
money
in
by
received,
of
amount
decreased
tion,
recognized
gain
on the transaction.
by
amount
creased
pro
as
assets,
over
They
total basis
that
then allocated
Reg.
26 CFR
regulations,
§1.334-2,
Treas.
in the
vided
greater
taking
(1982),
than zero
presumably
a basis
1.334-2
although
basis
of the shareholders’
the amount
feed,
in the
They
in the
their basis
in turn deducted
record.
doing
audit,
162.
expense
under
On
business
an
feed as
corporation’s
challenged
treatment
the Commissioner
asserting
taken into
should have
that Bliss
transaction,
grain
the shareholders.
distributed
the value of
by
paid
$60,000. Bliss
Bliss’ income
increased
He therefore
resulting
District
for a refund
and sued
assessment
stipulated
it was
Arizona,
where
for the District
Court
grain
Order,
Pretrial
at 3.
value of
see
$56,565,
had a
Relying
Farms,
Inc.,
Lake
South
Commissioner
(CA9 1963),
judg
rendered a
the District Court
F. 2d 837
authority
recognizing
of Bliss. While
ment
contrary,
favor
Transportation, Inc. v. Com
Tennessee-Carolina
(CA6 1978),
cert.
440 U. S.
missioner,
denied,
582 F. 2d
Appeals
saw
Lake Farms
the Court
South
1981)
(CA9
controlling
(per
and affirmed.
“If— “(1) property acquired by liquidation was a shareholder of a cor- poration redemption stock, in cancellation or “(2) respect acquisition— with to such
“(A) gain realized, was but “(B) as the result of an election made the shareholder under section gain the extent recognized to which section was determined under “then the basis shall be the same as the of such stock cancelled or basis liquidation, redeemed in the any money decreased in the re- amount of shareholder, ceived gain recognized and increased in the amount of to him.” solely tax bene- relies on the each case
The Government7 allays principle8 judicially developed some of fit rule—a accounting system. An an- the annual the inflexibilities of necessity practical accounting system if the federal nual is a payable produce is to revenue ascertainable and income tax regular Co., Burnet v. & Brooks intervals. Sanford strict adherence to an Nevertheless, U. S. system ineq- accounting annual would create transactional *7 apparently completed will Often transaction re- uities. an subsequent year, rendering open unexpectedly in a tax the reporting improper. taxpayer if instance, For a initial held a early apparently note uncollectible taxable that became year, unexpected recovery but the debtor made an financial year paid debt, before the close of the and the the transaction taxpayer, consequences would no tax for the for the have re- payment recovery capital. principal would be of If, recovery resulting however, the debtor’s financial the re- payment place year, took after the close of the taxable the taxpayer apparently would have a deduction for bad the debt 166(a) § year in the first under Code, 26 U. S. C. 166(a). § repayment Without the tax benefit the in rule, the year, representing capital, second return a of not would although taxable. The second transaction, then, economi- cally identical to the first, could, because of the differences accounting, yield drastically consequences. different tax by allowing The Government, a deduction that it could improper have known to be at the time, would be foreclosed9 7 81-485, In No. the represents Solicitor General the Commissioner of In Revenue, ternal while No. represents he the United States. We refer to the Commissioner collectively and the United States as “the Government.” 8Although originated the courts, rule approval has implicit Congress, which § enacted 26 U. S. 111 C. as a limitation on the rule. See n. infra. 9A analogous rule to the tax protects benefit rule taxpayer who is required report year in one right received under claim of that he improper any recouping because the tax saved from seeking possible Recognizing to avoid deduction.10 required long have the courts income,11 distortions rule, he is allowed deduction Under that up repaying. later ends 1341; Bittker, 1 B. Federal C. 26 U. S. year. generally subsequent See ¶ Income, 6.3 Estates and Gifts Taxation of the close improper occurs after the deduction proving the event When run, has not the Com if the of limitations year, even statute the taxable in require rule and remedy is benefit to invoke proper missioner’s reopen year. earlier See year rather than in the later clusion (1953); Commissioner, Dakota Con 20 T. C. South Corp. v. Lexmont (1932); Commissioner, B. T. A. Products crete Co. (J. Doheny Mertens, Taxation 7.34 rev. ed. Federal Income Law of J. Rule, L. Kanner, The Benefit 26 UCLA Rev. 1981);Bittker Tax & (hereinafter Kanner). (1978) Bittker & takes issue with this well-settled Much of Justice Blackmun’s dissent year the income in the the deductions amend- rule. The inclusion of cases, us for ing returns is not before these none of result, no doubt because the rule settled. parties suggested has such is so happen at all what on the remand It is not clear that Justice sought Neither has ever to file amended desires. an Blackmun years return. The statute of limitations has now run on the which the 6501(a), income, § dissent would attribute the and we have no indication years open the record held *8 that the Government has those for other reason. question us, if the accept
Even
were
we could
the
before
not
view of Jus-
is,
course,
It
Blackmun’s dissent.
of
true that the tax
rule is
tice
benefit
precise way
dealing
anot
of
with the
inequities
transactional
that occur as
the
accounting system, post,
a result of
annual
at
426.
n.
See
however,
approach,
Justice Blackmun’s
does
eliminate the
infra.
problem;
only multiplies the number of
If
rules.
the statute of limita-
year,
tions has run on the earlier
the
recognizes
dissent
rule that
the
apply
apply. Post,
we now
Thus,
must
at 425.
proposed
under the
scheme, the only
that,
difference is
if the
fortuitously
inconsistent event
between
year
occurs
the end of the
of the
running
deduction and the
limitations,
of
statute
the Commissioner must reopen
year
the earlier
or
permit an amended return even though it is
acceptance
settled that the
of
such a return after the date for filing
by
a return is not covered
statute but
within the discretion of the
See,
Commissioner.
g.,
Alexander,
e. Koch v.
(CA4 1977)
curiam);
income. of nom. Union Trust Co. Com aff’d sub v. (1939), B. T. A. 338 missioner, denied, U. S. (CA7), 2d 60 cert. 111 F. Products Co. Commis- Dakota Concrete (1940); South (CA3 1969). situation, recog- the any In income must be F. other 2d single year. Surely covering rule all situations would the later nized any disadvantages the rules that do not alleviate of preferable be to several single rule. approach in his A second in Justice Blackmun’s lies assertion that flaw any Changes made practice proposes the is like correction after audit. he proper they the of items under the on audit reflect treatment facts year. known of the taxable The tax benefit rule is were at end ad- problem to a different of events that occur the close of dressed after —that year. the taxable event, amending year of In whatever merits the return of the improper might been, originally deduction have we think it too late in day change judicial origins the rule. Neither the of the rule nor permits subsequent approach suggested codification by Justice Blackmun. suggests early dissent that the reason that the expounding cases required year
tax benefit rule
inclusion in the later
was that the statute of
adjustment
year. Post,
limitations barred
the earlier
at
n.
suggestion simply
That
does not reflect the cases cited.
Burnet San-
Co.,
&
(1931),
Brooks
judgment
sioner, 26 (1943) and n. 172 Rev., 129, 176, 178, L. 57 Harv. Today, Plumb).12 (hereinafter orderly of the disruptive an collection It be year. would end each reflect accounting again done over to must be that the
revenue to rule made, and year accounting for which the is occurring after the events Id., at 284-285 system.” accounting annual spirit of the would violate omitted). (footnote then, currently accepted of the tax reflect the view cases, Even the earliest rule. benefit rule, 8, tax benefit see n. 111, codification of the Further, partial in- provides gross It that supra, contradicts Justice Blackmun’s view. recovery of specified portion include a of a come for a does recovery deducted, implying the remainder of the amounts earlier g., 830, e. See, year. Rep. for that No. gross to income S. be included 1631, Sess., Sess., (1964); Rep. Cong., 77th 2d 79 2d S. No. Cong., 88th (1942). judicial supported origins if the of the rule Black- Even Justice obliged Congress. still to bow the will of we would be mun, supported developed, a number of theories taxation As the rule explained had year. taxpayer later One who taken the deduction g., e. proved it, “return” it if events him not entitled to “consented” to (ED Rothensies, Philadelphia National Bank v. Supp. 923, Pa. 43 F. 1942), another that the offset income in the ear explained while deduction g., e. year, might recaptured, lier “latent” which became income that Commissioner, National Bank Commerce 115 F. 2d 876-877 (CA91940); Lassen, Problems, The Tax Benefit Rule and Related 20 Taxes (1942). recognition view Still a third maintained that later g., E. Products South Dakota Concrete entry. income was a balancing Commissioner, Co. B. T. A. All views re these accounting present flected that the initial for the item must be corrected to picture accounting precludes reopening true of income. While annual year, prevent superior earlier precise does not less correction —far year, analogous practice none —in the current account financial Meigs, Mosich, Johnson, Keller, ants. See W. A. C. & T. Intermediate (3d 1974). Accounting 109 ed. This more measure concern with accurate always ment of income underlies the benefit rule and has. rule complete Even this did not create equivalence. transactional text, taxpayer second version of the transaction discussed might if, deduction, instance, have realized from the had no benefit he no year. Application taxable for that rule as tax benefit originally developed require recognize income on the repayment, so that principal the net result of amount the collection *10 propose taxpayers in these and the Government eases
The taxpayers of the tax benefit rule. The different formulations requires the inclusion of contend that the rule amounts recov- they years, do not view the events these ered later on the Government, hand, cases as “recoveries.” other requires urges that the tax benefit rule the inclusion of previously deducted if later events amounts are inconsistent “recovery” necessary it insists that no deductions; with application Further, of the rule. it asserts that the in these cases are inconsistent with events the deductions taxpayers. complete agreement taken We are not with either view. purpose accepted applications
An examination of the
“recovery”
always
the tax benefit rule reveals that a
will not
necessary
purpose
be
to invoke the tax benefit rule. The
simply
contrary,
the rule is not
to tax “recoveries.” On the
approximate
produced by
system
it is to
the results
a tax
accounting.
based on transactional rather than annual
See
generally
Byrne,
Bittker
270;
& Kanner
The Tax Benefit
Applied Corporate Liquidations
Rule as
and Contributions
Capital:
Developments,
Recent
56 Notre Dame Law. 215,
(1980);Tye,
221, 232,
The Tax Benefit Doctrine Reexamined,
(1948)(hereinafter Tye).
long
Tax L. Rev. 329
It has
been
accepted
taxpayer using
accounting
that a
accrual
who ac-
expense
crues and deducts an
in a tax
before it becomes
payable
eventually
and who for some reason
does not have to
of the debt would
recognition
Similarly,
of income.
might
the tax rates
change between
years,
the two
inclusion,
so that a
though
deduction and an
equal
amount,
produce exactly
offsetting tax consequences.
Congress
enacted
part
to deal
problem. Although
with
of this
change in the
may
rates
see Alice
due,
still lead to
differences
taxes
Phelan Sullivan Corp.
States,
United
180 Ct. Cl.
pay
must then
Mayfair
g.,
Min
See, e.
expense
deducted.
earlier
(CA5 1972)
456 F. 2d
Commissioner,
erals, Inc.
curiam);
Manufacturing
v.Co. United
(per
Bear
*11
(1971);
(CA7 1970),
1021
400 U. S.
denied,
cert.
152
F. 2d
T.
703
affirm
Haynsworth
C.
Commissioner,
v.
(CA5 1979); M.
Con
G.
F. 2d 1007
order, 609
ance
Standifer
B. T. A.
186-187
Corp.
Commissioner,
struction
(CA9 1935).
(1934), petition
Although Justice within the insists that this situation falls Stevens meaning “recovery,” only standard in- it does so the sense that an recovery. Post, crease balance sheet net worth is to be considered a at Bliss, n. 26. But in asserts that there is no Justice Stevens There, recovery. corporation’s sheet shows zero as the his- balance grain hand, toric cost of the corporation expensed because the the asset upon acquisition. liquidation, grain At the date of the historic cost of the greater zero, on hand was in fact than and an accurate balance sheet would have greater necessary reflected an asset account balance The than zero. adjustment thus reflects an increase in balance sheet net worth. g., Transportation,
See, e. Inc. Tennessee-Carolina v. Com- (alternative holding). pay- 582 F. at missioner, 2d, Or, party may imputed taxpayer, giv- ment to another to the ing recovery. Savings rise First Trust See Bank (alternative Taylorville 2d, F. United at holding). Imposition requirement of a that there be a recov- ery many simply require would, cases, the Government to argument terminology, cast its different and unnatural adding anything analysis.14 without purpose basic benefit rule tois achieve rough parity supra, transactional n. tax, see and to protect Government and from the adverse reporting assumptions effects of a transaction on the basis subsequent year proves that an in a event to have been erro- event, neous. an Such unforeseen the time of an earlier may many require application deduction, cases *12 agree however, benefit rule. We do not, that this conse- invariably quence every follows. Not will unforeseen event require taxpayer report the to in the amount of his contrary, earlier deduction. the the On tax benefit rule will only “cancel out” an earlier deduction when a careful exami- fundamentally nation shows that the later event in- is indeed premise consistent with the ini- on which the deduction was tially is, if based.15 That that had within event occurred the
14Despite Justice assertion that was Stevens’ Tennessee-Carolina wrong, post, 417, 26, at n. the case fits be of a what seems to his definition recovery taxpayer’s corporation enhancement the wealth—for the —an in Tennessee-Carolina received worth balance sheet stock more than the book supra. value its assets. n. the disagree See Thus we with that recovery bright-line easily assertion the rule applied. is a rule point Justice Stevens accuses in the creating us of confusion at this analysis by requiring the courts distinguish to “inconsistent events” from Post, “fundamentally at 418. That line is not the inconsistent events.” draw; rather, line merely we unexpected we draw the line between events and inconsistent events. approach
This
proposed by
differs
from that
the
that the
Government
attempted
explain why
Government has not
two events are inconsistent.
Apparently,
view, any unexpected
the Government’s
event is incon-
accept.
sistent with an earlier deduction. That view we cannot
the deduction.16
it would have foreclosed
same
year,
taxable
will be
recovery by
taxpayer
In
cases,
subsequent
some
inconsistent with
fundamentally
event that would
only
case,
such a
only
deduction.
granting
the provision
would
justify application
recovery
taxpayer
actual
if a
tax-
calendar-year
For example,
the tax benefit rule.
on December
for a 30-day
a rental payment
made
payer
§ 162(a)(3),
current
under
see
year
lease
in the
deductible
1.461-l(a)(l)
§
26 CFR
(1982);
§ 1.461-l(a)(l),
Treas. Reg.
g.,
Commissioner,
duction two ignores more it is taken basic First, certainty eventually reasons unrelated will expected consume the asset as often enter into the decision when allow instance, taxpayers the deduction. For burden of the desire save relatively expenditures careful allocation of small favors the allowance of single expenditures entire deduction in a of some business attrib- *13 operations utable year. generally to after the close of the taxable See Second, simply future, ibid. we cannot no predict the matter how care- fully instance, we year. scrutinize the deduction in the earlier For already case of the bad debt eventually repaid, require that is we that the 166(a)(1), apparently deduction, debt be worthless the of see but we often find that future perceptions, the does not conform to earlier and taxpayer Then, the collects the debt. practical “the deductions are neces- future, inability sities due to our to read the the and the inclusion of recov- ery in necessary income is to Dakota offset the deduction.” South Con- Commissioner, A., crete v. Products Co. 26 B. at T. 1432.
385 premises destroyed by of income if the leased were fire on January resulting inability taxpayer 10. The the to oc- cupy building fundamentally the would be an event not incon- prior ordinary necessary his as an sistent with deduction and 162(a). expense business under The loss is attributable the is consistent with the business18and therefore deduction payment ordinary necessary of the rental as an and business expense. premises hand, On the had the other not burned January, and, decided use them to house family operation his rather than to continue the of his busi- personal he converted the leasehold ness, would have use. fundamentally This be an event inconsistent with the business on which the deduction was In case use based.19 only provision if virtue of some fire, lessor— payment the lease—had refunded the rental tax- would the required payer recognize under in- be benefit rule to subsequent building. come on the destruction of the subsequent recovery previously words, other of the de- payment only ducted rental would be the event inconsistent provision allowing with the the deduction. It therefore applied evident that the tax rule be benefit must on a case- by-case A basis. court must consider the facts circum- light purpose stances of each case function provisions granting the deductions. place When the later event takes the context a nonrec- ognition provision Code, there will an inherent nonrecognition tension between the tax benefit rule and the provision. Corp. See Putoma 601 F. 2d Commissioner, (CA5 1979); (Rubin, dissenting); 734, 742 id., 751 cf. J., (ten- (1943) Helvering v. American Dental U. Co., S. 18The properly loss is acceptance attributable to the business because risk loss is a ordi judgment reasonable business courts narily Helvering, question. will Welch See U. S. (1933); Bittker, supra 9, ¶20.3.2. B. n. (“[F]ood Bittker, supra 9, ¶ See B. quintes n. 20.2.2 and shelter are infra, sential personal expenses”). nondeductible also at 395-396. See *14 gifts from income and treatment of sion between exclusion income). We cannot resolve cancellation of indebtedness rule that the tax benefit rule will with a blanket that tension particular always prevail. Instead, we must focus on the any provisions in at issue case.20 Code today clearly endorse follows from The formulation we development long of the tax benefit rule. Justice Ste- suggestion early in there is no cases vens’ assertion that early that the rule could ever be commentators or from physical recovery, applied did not involve a case that early frequently post, incorrect. The cases 406-408, ir- consistent with our view and framed the rule terms Barnett v. that of the dissent. See Com- reconcilable with might of the Government’s formulation An unreserved endorsement See, g., e. Brief range in a broad of cases not before us. dictate the results 81-485, 20; Respondent p. for in No. in No. 81-930 and United States 12; p. Arg. in No. Tr. of Oral 33. For Reply Brief for Petitioner implies proprietor instance, position that an individual Government’s expensed recognize the amount of the gift who makes a of an asset must (CA5 Prothro, income, Campbell cf. 209 F. 2d expense as but 1954). Johnson, Income, generally 2A & M. Federal Gift See J. Rabkin 6.01(3) (1982) (discussing Commissioner’s treatment and Estate Taxation assets). Similarly, suggests view gifts expensed the Government’s expensed an asset to his heirs the conclusion that one who dies and leaves return, of the earlier de would, recognize last the amount his now, however, will not deter duction. Our decision the cases before us situations; only demonstrate the mine the outcome in these other it will treatment analysis. require will consideration of the proper Those cases 1250(d)(1), (2), 1245(b)(1), (2), §§ which gifts legacies and as well as and rule, O’Hare, Statutory Non partial are a codification of the tax benefit see Tax Benefit Rule recognition Overriding Principle and the of Income Shareholders, L. Rev. Corporations 27 Tax the Taxation of at death from exempt dispositions by gift and transfers and which recapture Although there operation general depreciation rules. asset, expensed may personal an event in the use of an inconsistent rule, see, Campbell g., e. nonrecognition in the context of a event occurs Prothro, Bittker, 9, 5.21, ¶ resolution of 336; supra n. supra, at B. rule nonrecognition require a determination whether these cases prevails. or the tax benefit rule *15 (1939) 39 A. 864,
missioner, B. T. the (“Finally, present case is to a number of where . . . analogous others, [w]hen some event occurs which is inconsistent with a deduction in prior taken a have to be year, adjustment may made in in a item income for the balancing year which the reporting occurs”) added); Estate Block v. Com- change (emphasis of (“When missioner, or some other A., B. T. at recovery event which is inconsistent with what has been done in the occurs, in must be made past adjustment income reporting occurs”) in for the the year change which (emphasis added); South Dakota Products Commissioner, Concrete Co. (“[W]hen which is in- T. an adjustment occurs A., B. at 1432 consistent with what has been in the in done the deter- past mination tax liability, of the should be adjustment reflected occurs”) in for in it reporting year income the which (empha- added).21 sis The reliance of the dissent on the com- early is mentators in the articles cited the equally misplaced, dissent, cases, like the early often stated rule terms of inconsistent events.22 attempt to discount the explicit statement Estate Justice Stevens’ Block trigger recognition income, that inconsistent events would of of 408, 9,
post, singularly unpersuasive. at n. Appeals is Tax Board of “recovery” used the word opinion later it faced because was with recovery case, in that not repudiate hastily because it meant its discus opinion sion general Similarly, the same mere rule. assertion that the Treasury broad formulation Barnett of a followed a discussion 408, Regulation, post, support at n. of does not the view the dissent concept that the of represents early inconsistent with events break eases. 22“The recovery rule of taxation income from the or cancella requiring tion of previously designed pre items expedient, deducted a remedial the unjust vent enrichment taxpayer of a and to the benefit derived offset events, which, from a light taxpayer deduction to subsequent added). id., 131, 178. (emphasis entitled.” Plumb 176 See also words, “In a few basic If a tax- idea of the Tax Benefit Rule is this: payer has derived a his in- by reducing benefit from a deduction taxable deduction, come in the he income re- must declare as taxable covery original or other change his status which—ex nunc—makes heavily Finally, relies on the dissent Stevens’ Justice exclusionary aspect the tax ben- in 111 the codification requires include efit which rule, gave only a tax bene- deduction that rise to amount provision supra. does, That as the dissent n. fit, see “recovery.” By only ap- speak its terms, of a observes, delinquency plies amounts. Yet taxes, debts, to bad Commissioner, has Dobson 320 U. S. held, this Court always accepted since,23 has been and it 505-506 application exclusionary aspect not limit the does *16 contrary, appli- it On the lists a few of the tax benefit rule. general represents a endorsement the exclu- and cations sionary aspect rule to of the tax benefit other situations inclusionary part of rule. The to men- within the failure suggests they in 111 tion events no more that inconsistent trigger application of do the tax benefit rule than the recovery capital suggests to mention the of a loss failure supra. Dobson, it see not, does suggests recognizing err in also that we Justice Stevens equity the reason the tax rule.
transactional as benefit It recovery why is difficult to the clearest understand even eq- if should be taxed not for the concern with transactional uity, supra, Nor trans- see at 377. does the concern with equity change approach actional entail a in our to the annual system. Although basically accounting system the tax relies Lassen, unjustified.” deduction seem and Related The Tax Benefit Rule (1942) added). Problems, (emphasis 20 Taxes 473 example subject recovery One author saw his an of deductions —as —the rule: income or subsequent the broader a event reveals the “Sometimes reported by taxpayer Thus the unex- deductions to be erroneous. pected recovery portion already of a of an deducted re- amount lost and in which originally duces the loss as There are even cases determined. apparently finally accurately adjusted on items have to be determined subsequent Zysman, account a event.” Income from Re- Derived (1941) added). Deductions, covery (emphasis 19 Taxes 29 23See, 266; 330; g., Tye e. Bittker Kanner Plumb 144-145. & accounting, on annual see Burnet v. Brooks Co., & Sanford 282 U. the tax benefit rule S., eliminates some of the system. from distortions would otherwise arise such a Tye g., 268-270; e. Kanner See, 350; Bittker & Plumb n. nature of 172. The limited the rule and its effect accounting principle repetition: only the annual bears if the in of the event the earlier occurrence would have re- sulted the disallowance the deduction can the Commis- compensating require recognition sioner a of income when year.24 in the later event occurs approach today is consistent with our Our decision Nash rejected 398 U. S. There, United we argument required Government’s that the tax benefit rule a taxpayer incorporated partnership who a under 351 in- clude income the amount of the bad debt reserve of the approach seems to fear that our ac Justice annual Stevens counting system is inconsistent with way & Brooks in a that will Sanford power ignore vest new accounting system. collector to the annual Brooks, The fear is unfounded. & in who had Sanford long-term managed curred a net loss on recoup contract in a the loss year. lawsuit a later The earlier net losses on the contract contributed years perform net losses for the during business most of the tax ance of the rejected taxpayer’s contract. The Court contention that *17 should be to theory able exclude the award on the the the that award offset earlier net losses. This the accounting system per adherence to annual fectly approach consistent with the we follow the cases now before us. implicating analogous situations the per tax benefit rule or the doctrine mitting taxpayer the to a recognized take deduction earlier when right 9, under a claim of repaid, supra, problem must be see the n. is that taxpayer the has recognized mischaracterized some event. Either he has income that eventually income, turns a out not to or he has taken deduc tion that eventually turns out not be a Neither of these deduction. problems Instead, problem arose & was that Brooks. the there Sanford taxpayer the had properly expenditures properly was rec deducted ognizing thought income but the that the have matched in two should been year. same The tax rule the permit benefit does not the or Commissioner properly properly to rematch recognized income with deducted expenses; merely permits balancing entry apparently proper when an expense out improper. turns to be theory although
partnership. that, was Government’s gain the provides be no or loss on trans- that there will corporation in such a situation, to a controlled fer of assets partnership had bad debt deductions to create the taken 166(c), partnership terminated, and when see reserve, longer debt reserve. We noted that the it no needed the bad along corporation transferred with receivables were only Id,., at and n. 5. Not 5, reserve. was the bad debt “recovery,” id., but there was no no inconsistent there any fair kind. That the market value receiv- event of equal less bad debt reserve, face amount ables was reserve, that and the deductions that ibid., reflected con- the debts were still an accurate estimate of that it, stituted ultimately prove uncollectible, deduction and the was completely consistent with the later therefore transfer incorporated the receivables to business. See Citizens’ (Del. Corp. Supp. Acceptance F. United (CA3 1971), 1972); grounds, on other rev’d F. 2d Rev. Rul. 1978-2 Cum. Bull. Rev. Rul. 135; 78- generally Statutory 134; O’Hare, 1978-2 Cum. Bull. see Nonrecognition Overriding Principle of Income and the Corporations Tax Benefit Rule the Taxation of and Share- (1972).25 27 Tax L. 219-221 holders, Rev. currently
In the cases
before
must undertake
us, then, we
particular provisions
an examination of the
Code that
govern these
transactions to determine whether
deduc-
attempts
prior
Justice Stevens
as somehow incon
to read our
cases
here. Nash is the
approach
only
sistent with our
in which we have
case
and,
inclusionary
rule,
dealt with the
aspect of the tax benefit
we have
established,
recovery
there was
event in
neither a
nor an inconsistent
Commissioner,
In Dobson case.
we considered
tions taken the were inconsistent by taxpayers later and whether specific nonrecognition events provisions of the tax benefit rule.26 prevail over the principle
I—I »—I 164(e).27 Hillsboro, § In key provision the That section the deduction for taxes grants corporation its imposed but the It corporation. shareholders also denies the paid the any case, shareholders deduction for tax. this the the of argued Commissioner has refund the taxes State to the shareholders is the equivalent of payment from Hillsboro to its If dividend shareholders. Hillsboro income in does not the amount the earlier deduc- recognize it have deducted a dividend. Since tion, will the general structure tax does not de- corporate provisions permit dividends, duction of the Commissioner concludes that to the shareholders must be payment inconsistent with the deduction and therefore original inclusion requires amount of the as under tax taxes benefit rule.
26It noting holding requiring recognition is worth that a no income is not, suggests, as Justice Blackmun’s dissent a conclusion that tax Post, benefit “has application presented.” rule no to the situation at 422. general law, As a tax principle applies; simply rule of course does require recognition not of income. 27The Commissioner asserts also that Hillsboro deducted the taxes as a 461(f) § liability 461(f), §
contested legislative history under and that the Congress apply shows that rule if a intended that the benefit 461(f). successfully liability § contested a under do not deducted We view argument way this separate argument as in from the Commissioner’s 164(e). 461(f) § under grant force; Section own does deductions its expenditure qualify must as some deductible character under other 1.461-2(a)(l)(iv) § Reg. 1.461-2(a)(l)(iv), section. See Treas. 26 CFR expenditure deductible, but, If the qualify independently does contested, certainty because it is required it lacks the otherwise deduc 461(f) tion, § grants deduction, on the condition that the tax benefit rule will apply. apply, But for some the tax benefit rule there must be event provision granting is inconsistent The ques with the deduction. 164(e) tion here then appropriate remains whether the deduction is under or whether later with events are inconsistent that deduction. *19 consider argument, evaluating it is instructive this
In payment consequences of a shareholder the tax what 164(e) compare § corporation be without would tax 164(e). 164(e), § § consequences Without under them to the for the deduction, to a corporation be entitled not would §1.164-l(a), Reg. imposed Treas. on it. See tax is not §1.164-l(a) (1982); Electric Gas & (1944). Co. Wisconsin CFR corpora- If the 527-530 322 U. S. United profits, earnings would have to the shareholder has tion pay- recognize taxes, because a amount of by corporation a benefit of its shareholders is for the a ment 316(a); 301(c), g., §§ e. Ireland v. dividend. See constructive (CA5 1980); B. Bittker & F. States, 621 2d United Corporations and Income Taxation of Eustice, Federal J. 1979). (4th ¶7.05 shareholder, The how- ed. Shareholders to a deduction since the construc- would be entitled ever, 164(a)(2). § satisfy liability. his tax tive dividend is used the transaction would be a wash: Thus, shareholder, for the recognize of the tax as but he income,28 he would the amount offsetting cor- would have an deduction for the tax. For the pay- poration, consequences, there be no tax for the gives ment of a dividend rise to neither income nor a deduc- §311(a) (1976 V). Supp. ed., tion. U. S. C. § 164(e),
Under the economics of the of course transaction unchanged: corporation liability satisfying remain is still paying of the shareholder and is therefore divi- a constructive consequences significantly dend. are, however, dif- corporation. ferent, at least for the The transaction is still 164(e) § although wash for the shareholder; him denies the de- 28There exception would be an yet for a shareholder who earned had not in interest and $200 dividend income holdings from his stock in this and corporations other during year. the taxable He would be able to ex up clude received in year. $200 dividend and interest income for the (b) (1976 V). 116(a)(1), §§ See 26 U. S. ed., C. Supp. At the time of the transaction, 116(a). Hillsboro § exclusion was See U. S. C. $100. he entitled, otherwise need duction to which he would Reg. recognize dividend, Treas. income on the constructive § corporation But the 1.164-7 1.164-7, CFR that would not otherwise be available. entitled to a deduction 164(e) only permit is to the cor- effect words, other *20 agree poration Thus, we cannot with to deduct a dividend. simply give that, the because the events here Commissioner they rise cannot be consistent dividend, to a deductible with circumstances, the deduction. at least some a deductible contemplation ques- is of the Code. The dividend within the 164(e) permits tion we must answer is whether a deductible money, though the dividend these circumstances—when paid initially treasury, ultimately into state the reaches the shareholder —or whether the deductible dividend is avail- urges, only money able, when as Commissioner treasury, properly remains state as assessed and tax collected revenue.
Rephrased, question Congress, our now whether granting special corporations paid this favor to divi- by satisfying liability dends of their shareholders, was money paid by concerned with the reason the out corporation ultimately put. or with the use to which was 164(e) represents govern- Since a break with the usual rules ing corporate distributions, structure the Code does provide guidance provision. not on This reach provision “prompted by plight Court has described the banking corporations paid voluntarily of various which imposed upon absorbed the burden of certain local taxes their permitted pay- shareholders, but were not to deduct those gross ments from income.” Wisconsin Gas & Electric Co. (footnote omitted). supra, United at 531 The sec- substantially tion, in part similar has form, been of the Code since the provision Revenue Act of 1921, 42 Stat. 227. The merely was added Report the Senate, but its Committee mentions the discussing Rep. deduction it, without see No. S. Cong., 275, 67th only 1st Sess., 19 The discussion of Dr. appears T. Adams provision between S. to be that hearings. Dr. Adams’ the Senate at Smoot and Senator imposed property explains why the States statement but banks, it from the and collected the shareholders tax on light for on the reason the deduc- much not cast it does Hearings Fi- on H. R. 8245 the Committee before tion. (statement (1921) Cong., Sess., 1st 250-251 67th nance, Department). Treasury advisor, Sen- tax Adams, Dr. T. S. revealing: response, is more however, ator Smoot’s years. ... over 20 “I have been a director bank They paid I since have owned a share have ever nothing I I ... know about it. do of stock the bank. deductions, take cent of credit for and the banks They pay (empha- Id., are to it. it out.” entitled added). sis corporations payment liability of a that Con- *21 imposed gave
gress knew a tax on them29 the was not rise to Congress to deduction; entitlement a was unconcerned that corporations took deduction for amounts that did not satisfy liability. perceived apparently their tax It share- corporations independent holders and the another, one “know[ing] nothing payments by each about” the the other. In those circumstances, it is difficult to conclude that Con- gress corporation intended that the have no if the deduction independent par- State turned the tax revenues over to these 164(e) purpose pro- ties. We conclude that the was to corporations making payments, vide relief for these and the Congress payment focus of was on the act of than on rather long the ultimate use of the funds the State. As as the payment negated by corpora- itself was not a refund to change tion, in character of the funds hands of 29Dr. repeatedly Adams testified paid the banks the tax “volun tarily.” Hearings on H. R. Finance, 8245 before the Committee on 67th Cong., Sess., 1st recognize corporation require income,
State does not judgment below.30 and we reverse
I—I complicated. problem Bliss took a in Bliss is more de- §162(a), begin by examining so we must duction under 162(a)permits provision. a deduction for the “ordi- Section necessary expenses” carrying nary on trade or busi- and consumption predicated is on the ness. The deduction §Reg. Treas. 1.162-3, asset in the trade or business. See (1982) §1.162-3 (“Taxpayers . . . should include ex- CFR penses charges supplies only for materials and they actually opera- and amount that are consumed used .”) added). (emphasis If tion in the taxable . . the tax- payer consuming the asset rather than it in fur- later sells quite or business, therance of his trade clear that he deduction, would lose his for the basis of the asset would be (CA9 g., Spitalny e. 430 F. zero, see, United 2d 1970), recognize proceeds full so he would amount of the (c). §§1001(a), gain. general, on sale as See if the tax- payer expensed converts the asset to some other, non- use, business that action is inconsistent with his earlier de- require duction, and the tax benefit rule inclusion income of the amount of the unwarranted deduction. That nonbusiness use is inconsistent with a deduction for an ordi- nary necessary expense business is clear from an exami- 162(a) permits nation of the Code. While a deduction for §262 ordinary necessary expenses, explicitly business *22 legislative history reject Our examination of the thus leads us to Jus unsupported tice suggestion Congress Blackmun’s that focused on the Post, payment of a tax. theory suggests at 422. The he to the leads con that, taxes, clusion even if the State had not refunded the the bank would deduction, not have been entitled to the paid because it had not a “tax.” It Congress is difficult to plight believe that the that acted to alleviate “the banking corporations paid voluntarily various which and absorbed the bur States, Wisconsin Gas & Electric v. Co. United den,” 526, 322 U. S. 531 (1944), suggested intended the result the dissent.
396 1916 Act, expenses. for personal deduction
denies a
§5(a)(First),
section.
See
a single
were
the two provisions
been uniformly interpreted
has
The provision
39
756.
Stat.
those
attributable
for
only
expenses
a deduction
as providing
Kornhauser
See, e.
g.,
v.
of the taxpayer.
to the business
(1928);
on Proposed
U.
145
States,
United
Hearings
S.
Laws before
Subcommittee
of Revenue
Revision
Means,
3d Sess.,
75th
Ways
Cong.,
House Committee
(“a
reasonable
(1938)
deduc
granted
should
he has incurred in connection
tion
the direct expenses
income”)
with
added); see
his
Bittker,
generally,
(emphasis
if a
turns
Thus,
corporation
expensed
¶20.2.
as
supra
9,n.
as Bliss did
analog
consumption,
sets
personal
that
to shareholders31 —it would seem
here —distribution
amount of
take into income the
the earlier deduction.32
should
31“Paying
enjoyment
corporate]
[the
income.
the dividend was the
A
in
William
body
enjoy
way.”
said
its income
corporate can be
no other
States,
son
United
Ct. Cl.
F. 2d
conclusion,
Justice Stevens’ dissent takes issue with this
characteriz
the situation as identical to that Nash United
ing
In Bliss, taxpayers expense took a deduction for an and credited the asset account. Nash, expense Unlike the debit to the account the debit expense account did not reflect economic decrease value of the asset. When the taxpayers asset, clear transferred it became the economic decrease place pos- would not take Bliss —and hands of sibly never would occur.
To see the clearly, difference party more consider views of a third contemplating purchasing the asset on hand Nash and one contemplating
397 case, does not resolve this conclusion, however, That shareholders is governed Bliss to its by the by distribution the shields specifically taxpayer the Code that of provision We must therefore 336. gain proceed from recognition §— that this is the sort of unrec gain goes to whether inquire §336. Our examination background under ognized the framework of tax law §336 and its within convinces place us tax benefit prevent application that it does rule.33 enacted of the 1954 Code. It part
Section 336 was codi- Helvering, Utilities fied the doctrine of General Co. (1935), U. that a does not corporation S. recognize to its share- gain on the distribution appreciated property the enactment of the statutory holders. Before provision, Nash, purchaser In purchasing the on hand in Bliss. asset only willing pay to the face amount of the receivables less the amount by taxpayer— contra-asset account—the amount earlier deducted purchaser expect because that is all could to realize on them. In other words, the deduction reflected a real decrease the value of the asset. Bliss, hand, purchaser happy pay the other would be the value of grain, by expense undiminished taxpayer. deducted The deduction separable, and the asset remain and the can transfer netting one without out the other. Congress We are that aware considered to enact a but failed bill amending §§ any purchase 1245and 1250 price to cover deduction of the property. Cong., H. R. 94th 1st Sess. That bill would question here, have settled § § it is since clear that overrides 336. 1.1245-6(b) (1982). §1245(a)(1); §Reg. 1.1245-6(b), Treas. 26 CFR failure suggest to enact the bill Congress does not intended that de ductions subject under not be recapture. Both the House and Senate reported favorably bill, Rep. Committees on the No. 94-1346 S. (1976); Rep. H. it, R. No. passed Congress 94-1350 the House and adjourned any without action the Senate. See Calendars of the United (Final Representatives States House History Legislation ed. 1977). The Reports suggest Congress disposition by focused on sale thought subject event, the income recapture any possibly but capital gains ordinary Rep. 94-1346, rather than income rates. No. S. supra, 2;at Rep. H. R. supra, background, No. at 2. Given this we cannot draw inference from failure to enact the amendment. *24 provided regulations, expressed which the rule was recognize gain loss, or “how- corporation the may depreciated in appreciated assets] or [the have ever 39.22(a)- § Regs. acquisition.” 118, Treas. since their value added). recognized (1953) Report (emphasis The Senate Rep. regulation new No. §336, of the S. as the source this Report Cong., House Sess., 2d 83d 1622, provision: explained the fact that “Thus, its version appreciated depreciated in property has or the distributed corporation adjusted distributing its basis value over (a) [provid- way application the of subsection will in alter no Cong., ing Rep. nonrecognition].” No. 83d 2d 1337, H. R. added). (1954) (emphasis background This indi- A90 Sess., provision prevent the the real concern of is to cates that recognition appreciation of market that has not been realized arm’s-length party an to an rather than transfer unrelated might dispo- types to the shield all arise from sition of an asset. nonrecognition
Despite
language
the breadth
§
clearly
excep
nonrecognition
the rule of
is
not without
§
recapture
tion.
instance,
For
336 does not bar
under
§
§
depreciation
1250 of
excessive
on distrib
taken
§§
1250(a);
1245(a),
1.1245-6(b),
§§
Reg.
uted assets.
Treas.
1.1250-l(c)(2) (1982).
1.1250-l(c)(2),
§§1.1245-6(b),
26 CFR
countervailing
provisions,
statutory
Even in the absence of
nonrecognition
courts have never read the command of
“assignment
336 as absolute. The
has
income” doctrine
always applied
liquidation.
g.,
to
distributions
e.
See,
Siegel
(CA9 1972),
v. United
someone
taxes at a
rate.34
rec-
who
lower
Since income
pays
is
to
ognized
tax and
corporation
subject
corporate
taxed at the individual level
distribution
again
upon
to
shareholder,
of income from a
to a share-
shifting
corporation
holder can be
particularly attractive:
eliminates one level of
to that
incentive, corporations
taxation.
have
Responding
distribute
shareholders
con-
attempted
fully performed
tracts or accounts receivable and then to
invoke
to avoid
taxation
income.
of nonrec-
spite
language
have
courts
ognition,
applied
assignment-of-income
doctrine and
in-
recognize
required
corporation
come.35
then, clearly
Section
does not shield
tax-
*25
from
of all
on
payer
recognition
the distribution.
Next, we look to a companion
337, which
provision
gov-
§—
erns sales of assets
in
by
followed
distribution of
proceeds
It uses
the same broad
to
liquidation.36
essentially
language
34
instance,
recognizing
For
a
cannot avoid
the interest income
by clipping
coupons
on
he
giving
bonds that
owns
and
them to another
party. See,
g., Helvering Horst,
(1940);
Earl,
e.
“(A)
corporation,
stock
trade
of a
which
property
of the
or other
kind
properly
inventory
if
hand at
corporation
included
corporation
year,
by
primar-
close of the taxable
and
held
property
ily
business,
for sale to
trade or
ordinary
customers in
course of its
on the sale
recognition
gain
from the
the corporation
shield
alone would make
similarity
language
the assets.
336.
relevant
interpreting
§ of 337
the construction
two
reveals
provisions
they
function of the
addition,
337 was enacted
in tandem.
Section
construed
should be
United States
created
by
to the distinction
in response
Co.,
Public Service
Cumberland
338 U. S.
Holding
Co.,
Commissioner distribut- liquidated by cases, corporation those Under no in- recognized to its shareholders assets ing appreciated its §in even shareholders though as now come, provided after the distribution. See shortly the assets sell might Cumberland. sold the assets, though, If the corporation and a sale the share- sale, income on the would recognize in kind be attributed to the might after distribution holders Holding. To eliminate the neces- See Court corporation. distinctions and uncertainties created formalistic sarily Holding Cumberland, Court enacted Congress sell plan permitting corporation adopt liquidation, “(B) obligations acquired respect exchange of the sale or installment (without before, on, regard exchange to whether or occurred or such sale (a)) adoption plan after the date of the to in subsection referred (A) property subparagraph para- stock in trade or other of this described *26 graph, and
“(C) (other obligations acquired respect property installment in of than (A)) property in the date subparagraph exchanged described sold or before adoption plan of liquidation. such of “(2) (1) Notwithstanding subsection, substantially if all of paragraph of this (1) (A) property paragraph which is subparagraph described of such is, corporation attributable to a trade or in accordance with business section, transaction, exchanged this sold or then for person to one one (a) purposes ‘property’ of subsection the term includes— “(A) property such exchanged, so sold or “(B) obligations exchange. installment acquired respect of such sale or “(c) (1) apply exchange— This section shall not to sale or “(A) (as 341(b)), collapsible corporation made a in section or defined “(B) following if adoption plan complete liquidation, of a section applies respect 333 with liquidation.” to such
401 gain recognizing corporate loss its assets without or at the proceeds and distribute the level, shareholders. The § very purpose consequences was to 337 create same as §336. Corp. v. See Midland-Ross United 485 States, F. 2d (CA6 1973); Rep. supra, 1622, 110 No. S. 258. specific provi- are
There
some
differences between the two
largely
governing
period during
aimed at
sions,
which the
liquidating corporation
problem
its
assets,
sells
that does
corporation
when the
arise
distributes its assets to its
§
instance,
shareholders. For
337 does not shield the income
produced by
inventory
ordinary
sale
course of
corporate
business; that income will be taxed at the
level be-
proceeds
fore
distribution of
to the shareholders. See
337(b).
Congress
These
indicate
differences
did not
corporations
escape
intend
allow
taxation on business
carrying
corporate
income earned while
business
appreciation.
form; what
did intend to shield was market
protects
question
corporation
whether 337
from
recognizing
income because
unwarranted deductions has
frequently,
arisen
and the rule is now well established that
nonrecognition provision.
the tax benefit rule overrides the
(CA3
Connery
1972);
v.
States,
United
taken revisions major and has made 97-34, 172, L. Stat. 1981, Tax Act of Pub. g., e. L. 95-600, Pub. in the provisions, changes liquidation L. 95-628, § Pub. 92 Stat. 3628 337); 2904 (amending Stat. this univer- not act to (same), change longstanding, but did If the construction of the language rule. accepted sally in these circumstances has the § recognition 337 as permitting Lorillard Pons, 575, U. S. of Congress, acquiescence must conclude that intended the Congress we the same language parallel same construction of provi- in § sion 336. history §336,
Thus, legislative application tax and the law, other rules of construction of the general all indicate that identical does not language per- to avoid the tax benefit rule. corporation mit liquidating we reverse the of the Court of Consequently, judgment Ap- Bliss must include in in- that, and hold peals liquidation, come the amount of the unwarranted deduction.37 argued commentators have the correct Some measure of income that Bliss should include is the lesser of the amount it deducted or Feld, the basis that the shareholders will take in the asset. Tax See The Bliss, 443, (1982); Benefit of 62 B. L. Rev. 463-464 see Rev. Rul. U. also that, suggested 1974-2 Cum. Bull. 106. Bliss has not if Since income, there is an amount taken into it should be less than the amount previously deducted, point. we need not address the observes, post,
As Justice Stevens n. we do not resolve this question. perception His ambiguities elsewhere in our discussion of the recognized simply amount as income inaccurate. Our discussion of the consequences expensed asset, on the sale of an supra, at does suggest that the proceeds entire amount of on sale is attributable to the tax Instead, automatically benefit rule. we illustrated that the basis rules lead to operation inclusion of the amount of the tax ben- attributable is, proceeds efit rule. That equal plus any appreciation will the cost (or value). less appreciation recognized decrease in would be (or loss) gain ordinary sale, regardless decrease as of whether expensed had upon acquisition. the asset The reduction of the basis to zero when expensed the item is ensures that if it is sold rather than consumed along the unwarranted deduction will be included any appreciation, with and it is this amount that the tax benefit rule re- quires recognized to be as income.
V paid $60,000 Bliss the assessment on an increase of in its parties stipulated Court, income. In District taxable grain $56,565, that the value of the but the record does original grain por- what the cost of show was or what proper liquidation. tion of it remained at time of The in- portion grain in taxable is the of the of the crease cost liquida- attributable to the amount hand the time tion. In we remand for a Bliss, then, determination taxpayer sought Hillsboro, In amount. a redetermina- paying in Tax rather tax, tion Court than so no fur- necessary, proceedings judgment ther are and the Appeals Court of is reversed.
It is so ordered. concurring in No. 81-930 and dissent- Brennan, Justice ing in No. 81-485. join opinion.
I Parts I, II, and IV the Court’s For the expressed in Part I reasons of Justice dissent- Blackmun’s ing opinion, proper application I believe however, principles opinion II set out Part of the Court’s require an affirmance rather than in No. 81-485. a reversal joins, with whom
Justice Marshall Stevens, Justice concurring judgment dissenting in No. 81-485 and No. 81-930. way. two
These cases be should decided the same taxpayer corporation. in each In each tax- case payer expenditure, made a its deductible share- corporate holders received an economic benefit. Neither expenditure. part ever recovered of its 1972 my opinion, the benefits received the shareholders 1973 matters those are that should affect bene- returns; their give fits should not rise to income on 1973return taxpayer in either case. require apply
Both us rule. This cases the tax benefit always important rule it deter- limited, has had a but office: taxpayer— mines whether certain events that enrich the expenditures past recoveries characterized as —should income.1 It does not create income out of events that do taxpayer’s not enhance the wealth.
Today purpose the Court declares that the of the tax bene- approximate produced by sys- fit rule is “to the results a tax accounting.” tem based on transactional rather than annual previously *29 at 381. the Ante, Whereas rule has been used to wealth-enhancing determine the character of a current event, light past when viewed deductions, Court now suggests requires study propriety that the rule of the light earlier deductions, when viewed in the of later events. operates The Court states that the rule to “cancel an out” premise earlier deduction if the on which it is based is “funda- mentally year. inconsistent” with an event a later Ante, at 383.2
The Court’s reformulation of the tax benefit rule consti- extremely significant enlargement tutes an of the tax collec- powers. identify groundbreaking tor’s In order to char- history acter of I the decision, shall review the of the tax benefit Dairy rule. I shall then discuss the Bliss case comfortably some to detail, demonstrate that it fits within Simons, (1938) H. Cf. Personal Income (defining Taxation 50 income as net property accumulation of rights year, over plus the course of a con sumption during year). that 2Notwithstanding legitimacy this focus on the deductions, of the 1972 scrutinized with the hindsight aid of completion multiyear after the of a transaction, the Court is careful not require that ineq “transactional uities” be dealt with in the Ante, “precise way” most imaginable. at n. rejects 10. It Justice suggestion the 1972 re tax Blackmun’s “ reopened, turns be quite properly noting past our observations that ‘[i]t disruptive orderly of an collection of the revenue to rule that the accounting must again be done over occurring to reflect events after the year for which accounting made, spirit and would violate the Ante, system.’” annual accounting 10, quoting Healy v. Com at n. missioner, 345 U. S. ante, See also n. 12. to which the benefit rule has not class of cases been explain why past. Finally,
applied in I shall Court’s only lawmaking misguided is not but does adventure disposition explain inconsistent of these two even its similar cases.
I today What is called the “tax benefit rule” evolved two reflecting stages, components. the rule’s two The “inclu- sionary” requires recovery component that the within a tax- previously gross able of an item deducted be included in “exclusionary component,” gives income. The which inclusionary component operate rule its name, allows only prior extent deduction benefited the taxpayer. inclusionary component originated rule
Bureau of Internal Revenue in the context of recoveries of previously debts that had been deducted as uncollectible. inequitable permit The Bureau that it sensed a tax- recovery payer to characterize the of such debt as “return *30 capital” prior year of when he had been allowed to reduce compensate capital. taxable his income for the of that loss one As commentator it, described “the allowance of a de- portion gross being duction in a taxed; results income not recouped, recovery when the deducted item is stands place gross of the had taxed income which not been before quickly principle therefore taxable.”3 This en- Appeals dorsed Board courts. Tax and the See Printing Excelsior Co. B. v. 16 T. A. 886 Commissioner, (1929);Putnam 2d National Bank v. 50 F. Commissioner, (CA5 1931). 158 3Plumb, Today, 129, 131, The Tax Benefit Rule 57 n. 10 Harv. L. Rev. (1943). Accord, Estate Commissioner, Collins v. 765, B. T. A. 769 46 (1942), Commissioner, rev’d sub nom. Harwich v. (CA8), F. 2d 732 133 Commissioner,
rev’d sub nom.
Dobson
v.
The Bureau first
inclusionary
counterweight
equitable
to the
the natural
component.
Bull.
1937-1 Cum.
80.
It soon
18525,
M.
G. C.
recovery
insisting
that
could
however,
retreated,
prior
if the
deduction had not bene
income even
treated as
taxpayer.
1940-2 Cum. Bull. 76.
22163,
G. C. M.
fited the
g.,
Exchange
Appeals protested, e.
Com
of Tax
The Board
Commissioner,
Trust
46 B. T. A.
Bank
Co.
National
&
Appeals
sided with the
but the Circuit Courts
1107
Helvering
Trust Co.,
Bank &
Bureau.
State-Planters
(CA4 1942);
v. United States
Inter
F.
Commissioner
&
2d
(CA3 1942).
Corp.,
The most feature of the rule’s is that early years, through until the codification, its formative Congress,5 the Internal Revenue 1960’s, Service,6 courts,7 111(a) provides: Section recovery during “Gross income does not include income attributable debt, tax, amount, prior delinquency taxable of a bad or debt, recovery respect extent of the amount of the exclusion with to such added). tax, (emphasis or amount” 156(a) Ibid. 619, I, § provisions also the Title See detailed of ch. 21, 1942, 852, amended, Aug. 16, Act of Oct. ch. 56 Stat. Act of 343, repealed, XIX, 1901(a)(145)(A), 68A Stat. Act Pub. L. Title 4, 1976, including of Oct. establishing Stat. a mechanism for previously recoveries of to the extent claimed war losses current *31 of tax benefit. following passages regulations §
6 Consider the 111. from the under recovery “General. Section 111 provides income attributable during any year taxable debts, taxes, prior delinquency of bad gross amounts shall be the ‘recov- excluded from income to the extent of
407 the same it in essentially understood commentators,8 charac a theory appropriately all it as saw They way. income. Although of as capital recoveries terized certain the annual account to accommodate undeniably helped rule I have no found transactions, sugges to multiyear ing system pre- to The rule of exclusion so ery respect with such items. exclusion’ losses, equally respect expend- to all other applies statute with scribed gross from income for accruals made the basis of deductions itures and , including including . deduc- prior years, war losses . . but taxable amortization, depletion, amortizable respect depreciation, or tions with . . . premiums. bond ‘recovery’. receipt from the amounts in Recoveries result
“Definition of of items, previously or section 111 such respect of the deducted credited debt, paid, or taxes from the collection or sale of bad refund credit of 1(a), § Reg. or 26 cancellation taxes accrued.” Treas. CFR 1.111— (1982) added). 1(a) § (emphasis 1.111— also: Consider provisions “If loss in with deducted a accordance this paragraph year and in a subsequent taxable receives reimbursement for loss, recompute such he does not year the tax for taxable in which the deduction was taken but includes the amount of such reimbursement his gross year received, subject provi- the taxable in which 111, relating recovery previously sions of section deducted.” amounts 1.165-l(d)(2)(iii) (1982). 1.165-l(d)(2)(iii), Reg. Treas. 26 CFR g., Commissioner, 7 E. National Bank Commerce v. F. 2d 115 875 (CA9 1940); Commissioner, South Concrete Dakota Products Co. v. 26 (1932). B. T. 1429 A. Costigan, Litigation, See Income Taxes on Recoveries from Civil Pro ceedings 559, (1954);Atlas, of U. S. C. Tax Inst. Tax Free Re 567-570 Inst, Rule, coveries: The Tax Benefit N. 9th Y. U. on Fed. Tax. 847 (1951); Tye, The Reexamined, Tax Benefit Doctrine 3 Tax L. Rev. 329 (1948); Plumb, 129, The Tax Today, 131, Benefit Rule 57 Harv. L. Rev. (1943); n. Lassen, Problems, Tax Benefit Rule and Related (1942) (statute Taxes problem limitations not a because “all element, these cases have a namely, recovery new or increment value or of liability decrease in which income was determined Commissioner to received); Note, have been 56 Harv. L. Rev. (1942); Zysman, Income Deductions, Derived From Recovery (1941);Ayers, Taxes 29 Recoveries, Bad Debts —Deductions and 18 Taxes *32 408 of method approxi as a generalized regarded that it was
tion the fab through accounting system a transactional mating inconsistent fundamentally of a at the drop rication of income condi always necessary was event An inconsistent event.9 of the discussion exception tion, possible but with Commissioner, in Barnett Tax Appeals Board of never itself a by (1939), inconsistency B. T. A. Significantly, the rule.10 reason for applying sufficient the tax benefit rule with dealing from this Court first case in And when recovery.11 litigants the role of a emphasized (1939), Commissioner, B. T. A. 864 all of the Barnett v. Except for Court, ante, recovery. involved a early by the cases cited (1939), Commissioner, of 39 B. T. A. the Board Estate Block v. following Appeals made the statement: Tax recovery event which is inconsistent with what has “When or some other occurs, adjustment reporting made in past must be been done system year change practi- in which the occurs. No other would be for the limitations, the obvious administrative cal view of the statute of difficul- involved, finality liability, ties and the lack of in income tax which would foregoing principles, by result. The which have been established the fol- cases, lowing require that the refund here be included the income of this year recovery.” estate for the
Notwithstanding general reference to an inconsistent event in the first sentence, quoted it is obvious succeeding from the two sentences that the intending lay groundwork Board was not theory for a new of the tax Rather, attempting benefit rule. it was respond suggestion adjustment year year be made of deduction rather than the recovery. This by conclusion is quoted confirmed the fact that the third speaks year sentence of “the recovery,” not “the of inconsistent event,” the fact that each of the 14 eases cited the Board follow- ing the quoted conclusion of the passage, like Estate Block itself and like Commissioner, South Dakota Concrete Products supra, Co. v. involved recoveries the traditional sense. 10It should be Barnett, noted that even in Appeals the Board of in Tax cluded its discussion of only inconsistent emphasizing events after that the prior inclusion income of a depletion oil required by deduction was Treas ury Regulations that had been by Congress. A., ratified 39 B. T. at 867. 11In Commissioner, Dobson v. 320 U. taxpayer S. had bought stock, loss, sold it at a and then claimed a deductible loss on his tax Eight years return. later, had sued for rescission of the purchase, stock fraud; claiming he settled the approxi- suit and received accounting system suggested that a transactional this Court expressly impose equitable, declined more we would be finality practicability importance stressing one, *33 system.12 a tax $30,000 up- he the loss. We stock on which had sustained
mately for the $30,000 recovery that the did not need held the Tax Court’s determination income, had re- since the earlier deductible losses not reported to be present For taxpayer’s year he had claimed them. duced the taxes way significant in Dobson was less than the it en- purposes, holding analysis: dorsed the Tax Court’s liability years attempted revise for earlier closed
“The Court has not to Tax limitation, any expense, liability, or deficit of a by of nor used the statute year. a It went to prior year subsequent prior to income of reduce the recovery, return years capi- to determine the nature whether only of added). Id., (emphasis tal or at 493 income.” events, was but question The tax benefit not one inconsistent whether capital return recovery should be characterized as or as income. Co., (1931), 12 Burnet & Brooks 282 U. S. was a mirror Sanford image taxpayer argued recovery previously of this case. The that a de because, view, ducted funds should be income from a not seen transactional profits no net had realized. The been Court framed the issue as whether profits accounting periods, net are to be fixed determined “on basis of particular taxpayer they or... on the basis of when transactions of the are brought Id., ato conclusion.” 363. The answer was unanimous and unflinching:
“A taxpayer may receipt be in net income one and not another. years, net result of two single period, if in a taxable combined might loss; be a still but it has supposed never been that that fact would first, relieve him from a any postpon- tax on or that it affords reason ing the lifetime, assessment of the tax until end of a or for some other period, indefinite precisely to ascertain more whether the final outcome of period, or given transaction, of a will gain be a or a loss. “The Sixteenth adopted Amendment government to enable the to raise revenue any system taxation. It is the essence of of taxation that it produce ascertainable, should government, revenue payable and at regular Only by system intervals. practicable produce such a is regular flow of apply income and assessment, methods of accounting, and capable collection practical operation. suggested It is not that there has any ever general been taxing scheme for . other basis. . . While, conceivably, system a different might be devised which the tax assessed, wholly could be part, finally or in on the basis ascertained particular results of transactions, Congress required by the amend- support of some Commissioner, with 1960’s, In the urge began the tax Court, the Tax commentators given Nash office.13 a more ambitious rule be benefit argued the Commissioner 398 U. S. United in which the tax- limited to cases not be rule should that the recovery, but rather should payer an economic had made whenever later operate deduction out an earlier to cancel longer is no entitled that the events demonstrate rejected, arguments were that case advanced, it. The opinion remarkably in the Court’s to those found similar today.14 method, system preference to the more familiar adopt
ment to
such a
Id.,
practicable.”
if
at 364-365.
even
it were
*34
Commissioner,
Healy extreme
The Nash case busi the sale of a partnership arose out of had taken deductions The partnership ness to a corporation. account that debt reserve” —an entries a “bad for ledger ac of its future losses from the firm’s estimate reflected eventually uncollectible. become counts receivable that sold to a corporation, business was When the partnership rule, the tax benefit apply arguing Commissioner sought had made no recovery that even the partnership though reserve, debt deductibility the amount the bad reserve had been justified additions to the taxpayer’s presale was no valid after on the basis of an assumption longer sold.15 the business was
This Court Commissioner’s flatly rejected position. Rather than deduction scrutinizing premises prior used the subse- events, Court light subsequent events themselves as its Since the quent starting point. transfer of the bad debt reserve did not enrich the taxpayer, there was no current realization event justifying applica- tion of the tax benefit rule. the ‘need’ for the “[Although reserve the transfer, ended with the end of that need did property. the reserve to his income and him a accord loss on the sale (face realized) That equals this loss value less amount the amount of the against principle restoration to income does not militate the basic that the longer needed, irrespec- reserve must be restored to income when it is no tive recovery.” of whether there has been an Brief for economic United in Nash 678, pp. States v. United T. 8-14. O. No. (a) *35 argued The taxpayer Commissioner an accrual is nor basis (b) mally only uncollectible, allowed to deduct accounts that are receivable taxpayer had taxpayer been allowed to take a deduction because the being represent allowed eventually pres that it would find some (c) ently uncollectible, collectible accounts to be and those accounts had not in fact become they taxpayer’s uncollectible at the time left the hands. The Commissioner asserted that the earlier deduction had been allowed assumption fairly represented taxpayer’s continuing that it “need” for bad years. argued debt deductions that once the across taxable He hands, accounts taxpayer’s receivable left the it had no further “need” for the bad premise prior debt reserve and that the for the deduction had be come invalid. ibid. See meaning ‘recovery’ of the tax benefit mark a within
not at 5.16 Id., cases.” again
Today, before it a case in has which the the Court the endorsement of some commentators Commissioner, with pushing closely Tax for a more Court, and a divided ambi- accepts time, rule.17 This the Court the in- tious tax benefit legislation sug- has been no since Nash vitation. Since there approach past half-century18 gesting that our over has wrong-headed, cf. n. the new 32, infra, been doctrine that today’s emerges making. decision is of the from Court’s own Dairy today Bliss case, the Court reaches a result contrary by recovery theory. to that a dictated One would expect past apparent such a break with the unless were prior produce palpable inequity law would clear—a taxpayer. windfall for the Yet that is not the case Bliss Dairy. Indeed, tax economics of the case are indistin- guishable from those of the Mash case. taxpayer’s receipts
16 The
from the sale of the business was not a recov
ery because, to the extent the accounts receivable
were offset
the bad
reserve,
corporation
debt
paid
had not
penny
for them.
It
Nash and Schmidt from
distinguished
was this fact that
ap
earlier cases
plying the tax benefit rule to bad debt reserves such
Savings
as Arcadia
&
Loan
Commissioner,
Assn. v.
(CA9
1962),
Three the Commis- § Dairy. pursuant 162(a),19 First, interact in Bliss sioner, corporation the Commissioner allowed deduct the en- grain purchased in tire cost of all 1972. That deduction left it grain. in that Second, with a basis of zero under the terms corporation required recognize any §336,20 was not § through gain liquidation or it went a 333 in loss when 1973. § pursuant regulations implementing third, And 334,21 assign'some portion the shareholders were allowed to of their corporation’s grain they basis in the stock to the received liquidation. Admittedly, provisions this combination of “step-up” grain’s could some cases cause a basis that corporation is not reflected in the income of either the or the possibility figured strongly shareholders. That in the deci- Appeals sion of the Court of for the Sixth Circuit to endorse theory precursor an inconsistent-event in a of this case. See Transportation, Tennessee-Carolina Inc. v. Commissioner, (1978). 582 F. 2d and n. 14 378, 382, And it is stressed argument the Solicitor General in his in this case. Brief for Respondent United States No. 81-930 and for in No. 81- pp. analysis potential 39-42. Yet close reveals that the step-up extraordinary untaxed inequita- is not the sort of extraordinary ble windfall that calls for measures this case. part, 162(a) “[tjhere In relevant provides § U. S. C. shall be al lowed as a deduction ordinary all the necessary expenses paid in or during curred taxable in carrying on trade or business . . . .” part, In relevant § 26 U. provides S. C. 336 gain that “no or loss shall recognized corporation to a property partial distribution of or complete liquidation.” part, In relevant § 26 U. provides S. C. 334 property . . “[i]f. was acquired by a shareholder in the liquidation corporation of a in cancellation redemption or stock, and . . . the extent gain recognized to which was § determined under then the basis shall be the same as the basis of such stock cancelled or liquidation, redeemed in the decreased any money amount of received shareholder, and increased in the gain amount of recognized to him.” The implementing regula relevant tions are found at Reg. 1.334-2, Treas. 26 CFR 1.334-2 *37 the tax re- does not include the record matter, As a factual Dairy’s haveWe no indication shareholders. Bliss turns of actually any, step-up in occurred. And basis if much, howof expressly contemplates liquidation legal a 333 matter, as a in steps-up Thus, reflected income. are not in basis that corporation as the Court believes it had behaved if the even grain to the cows before had fed all the have and should assigned liquidating, stock basis was shareholder whatever step up grain have been used to in this case would passed in that to the shareholders other asset basis of some liquidation. might argued step- suppose that this sort of untaxed I it accidentally, acceptable happens up if but not if a tax- is solely manipulates payer transactions to take business advan- again tage here we have too little of it. Yet information to manipulation conclude that there has been such Dairy. begin case of Bliss To with, Government has questioned propriety never of the 1972deduction, viewed light in Moreover, of 1972events.22 the record before us appeal Dairy’s does not tell us how much feed the cattle consumption in 1972, consumed whether 1972 exceeded 1972 purchases, purchased compared or how the volume in 1972 purchases prior years. quite possible in with Indeed, it is Dairy abnormally large purchases in that 1971the had made hedge against possible price, as a a rise the market consumption grain actually that its 1972 exceeded its purchases during year. $150,000 that It is no doubt for these reasons that the Court never relies step-up argument opinion today.23 on the untaxed in its Un- partial quotation Court’s Reg. 1.162-3, of Treas. 26 CFR 1.162-3 (1982), ante, 395, suggests may that it regard the deduction for uncon sumed feed as improper because the feed consumed and “actually was not operation used in ibid. year,” course, taxable if really Of the Court believed that such a allowed, deduction should not be proper course of action would be modify the rules authorizing deduction, see n. infra, rather than modify the tax benefit rule. 23It should also be potential noted that the step-up, an untaxed which may give rise to a second this, deduction in cases such as analytically is
fortunately, only argument place the Court offers its ipse wrong an dixit: it seems for a not to in- realize up come if it use an when it asset, fails to was allowed to de- prior year. rejected duct the value of that asset a We precise proposition Dairy, in Nash. Nash both and Bliss subsequent the transfer of the business revealed (i. matching prior grain a business asset deduction e., matching expense deduction, or the account receivable deduction) (i. matching up the bad debt would not be used e., uncollectible) passed consumed or until it become had to a dif- *38 taxpayer.24 only explanation today’s ferent The decision recovery mooring to detach the tax benefit rule from the appears challenge open in to be the to be found an sea of hypothetical troublesome and inconclusive cases.25 in Nash. potential same for a present double deduction that was States, United States Nash v. United Brief for in See O. T. No. pp. 20-31. in Nash. timing point explicit The Solicitor General made this “Since a represents reserve for bad debts losses that are estimated will be sustained subsequent years, in taxable . . . unabsorbed amounts in such a re serve must be restored income when ... it becomes clear that the tax payer will not suffer some or all of the estimated losses as a result of the Id., uncollectibility of accounts receivable.” at 8-9. discussion, in approach exemplified by The flaws the Court’s are its ante, hypothetical involving paid of a situation a tenant who has 30-day years the entire cost of a lease that straddles two taxable on Decem year. ber 15 of the first
The Court first invites would re- consequences consideration of what tax premises year. sult if the I January burn down of the second think it obvious that a under such cir- does not realize income cumstances, manages and the Court this result to its to accommodate (the theory. though original explanation Even busi- for the deduction valid, premises) longer ness would make use of the the Court finds is no inconsistency no fundamental because “the loss is attributable business.” goes hypo-
The through Court this exercise in order to reach the next thetical, wherein taxpayer voluntarily stops using for a the leasehold purpose entire during year. Having business the second assumed that the de- during year, cost of the lease was deductible the first the Court now I—I I—I I—I play important
Because tax considerations such an role relating capital, to the investment of decisions the transfer operating management going businesses, and the con- special orderly, cerns, there is interest certain, and interpretation consistent of the Internal Revenue Code. To- day’s seriously compromises decision that interest. It will uncertainty, engender enlarge gatherer’s it will the tax dis- cretionary power past to reexamine transactions, and it will produce controversy litigation.
Any
theory
inconsistent-event
of the tax benefit rule would
system
complicated
make the tax
more
than it has been
recovery theory.26
analysis
under the
Inconsistent-event
dares that the tax benefit rule
prevent
must be invoked to
a tax inequity.
methodology
Court’s
regard
quite
this
revealing.
pre
It has
validity
sumed the
year,
the deduction in the
Zaninovich v.
citing
first
(CA9 1980).
Commissioner,
forces a deviation from the traditional during given year: identify a the transactions in which taxpayer was made wealthier, determine from the his- tory apparent of those transactions which sources of enrich- ment should be characterized as income, then determine recognized. how much of that income must be Of course, specific Congress already several contexts, has mandated de- pattern,27 viations from that traditional and the additional complications appropriate price are often deemed an equity. my knowledge Congress enhanced tax But to has sweeping general never even considered so a deviation as a theory. inconsistent-event general theory a
Nonetheless,
inconsistent-event
surely give
guidance
vague hybrid
more
than the
established
today.
newly
the Court
The dimensions of the Court’s
“fundamentally
fashioned
inconsistent event” version of the
(CA7 1970),
Haynsworth Commissioner,
v.
(1977),
The Court
that the
“recovery”
term
too
broad because two
courts have
recovery
claimed to find a
in situations the
finds sur-
Court
prising.
Commissioner,
Tennessee-Carolina Transportation, Inc. (CA6 1978) (alternative
F. 2d 378
Savings
First
Bank
Trust and
holding);
Taylorville
(CA7 1980).
v. United
27 E. §§ dispositions depreciable property of certain income). depreciable and certain realty may give rise to obviously rule are no means clear. benefit It differs theory from both the Government’s “inconsistent event” “recovery” theory, require the familiar either of which would way. these two cases to be decided the same I do not precisely why theory understand, however, Court’s dis- tinguishes applied cases, between these or how is to be computing Dairy, taxes of Bliss Inc. “subsequent
The test Government describes its as whether premise events eliminate the factual on which the deduction originally claimed.” Brief for United States No. 81- Respondent p. 930 and No. 18. The Court describes its test as whether “the later event is indeed funda- mentally premise inconsistent with the on which the deduc- initially might tion was based.” Ante, at 383. One infer that the difference between these tests is a difference “in- between “fundamentally consistent events” and inconsistent events.” attempts place precisely The Court the line more “between merely unexpected events and inconsistent Ante, events.” attempt n. 15. I am afraid the fails because, however cleanly predictably sepa- it is described, the line does not position rate the Court’s from the Government’s. presents
The Court
its test as whether “the occurrence of
year’s]
[later
event in the earlier
would have re-
sulted in the disallowance of the deduction.” Ante, at 389.
rejects
But in Hillsboro, the Court
the Government’s claim.
The Court
if
holds that
this Court had decided Lehnhausen v.
Lakeshore Auto Parts Co.,
The new create confusion than that accompany dispo- which will efforts to reconcile the Court’s sition of these two cases. Given that Nash is still considered good prior expenses it is not which Court, law clear Dairy, give Inc., Bliss will rise to income 1973. Presum- ably, expenses purchase tangible supplies all for the will be corporate paper treated like the cattle feed. all Thus, tow- paper clips, pencils els, that remain on will hand become liquidation. income as a result of the It clear, is not how- expenses pro- other ever, how Court would react to that enduring limiting principle I vide an benefit. find no opinion distinguishes pencils Court’s that cattle feed and from prepaid prepaid employee rent, insurance, accruals of vaca- advertising, management training, tion time, or other expense going that will have made the concern more valuable directly when it is owned its shareholders. opinion in- Court’s also leaves unclear the amount of fundamentally
come that realized in the in which the opinion, inconsistent event occurs. most its Court “the amount indicates that is deemed to realize from, of his earlier to time deduction,” ante, 383, at but time equivocates,29 suggests the Court and at least once when noteworthy assumption— 28 Itis authority that the Court for the cites no critical its if the interpretation liquida under rule —that tax benefit Dairy, 1972, Inc., purchased tion of Bliss had occurred in deduction but unconsumed cattle feed would disallowed. have been footnote, ante, 37, In a suggests at n. Court it is not previ addressing figure the issue of whether some less than the amount ously might possibilities sug- deducted been appropriate. Two have sold, an asset is the “amount of only expensed proceeds Dairy, ante, Bliss is income.30 Even in at sale,” which revolving inventory involves commod- fungible I requires am not sure how the Court the “cost” of ity, grain, ante, If to be computed. corporation’s its 1972 consumption purchases, matched one might *42 think that the relevant cost was that the prior when years I was built cannot tell or surplus up. whether why the fundamentally theory inconsistent-event prefers LIFO ac- over FIFO. counting
IV Neither nor sound tax history policy supports the Court’s abandonment of its of the tax interpretation benefit rule as a tool for certain recoveries as income. If characterizing Con- were gress dissatisfied with tax treatment I that believe Dairy Bliss should be accorded under current it law, could of respond by changing the three that provisions bear supra, on this case. See at 413. It could modify the manner in which deductions are § authorized under 162.31 It could gested: lesser-of-prior-deduction-and-current-fair-market-value, see Ten- Transportation, Commissioner, nessee Carolina Inc. 440, 65 T. C. lesser-of-prior-deduction-and-shareholder’s-basis, and Feld, see Bliss, (1982). The Tax of Benefit 62 U.B. L. Rev. 443 Given uniform “ tenor of the theory Court’s that tax benefit rule serves ‘cancel out’ deduction,” ante, 388,1 an earlier unlikely at think it that it would endorse possibility. either view, course, This of recovery theory conforms to what a would dic (CA1 1980) Commissioner, Rosen tate. See (taxpayer 2d 942 F. realizes the asset, value recovery). recovered determined at time of 162(a) If inclined, it were modify provide § so it could that no deduc tion would be for purchase instead, allowed supplies; of materials and a deduction would be only consumption. allowed at the a time of Such senti statement, ante, clearly ment underlies the “[t]he Court’s that de predicated duction is consumption on the asset in the trade or business.”
Alternatively, provide could purchase supplies that a materials not be an “ordinary expense” considered and necessary extent it in- cludes items will probably not during year. be consumed the taxable As the Solicitor General Court, notes in his this might brief before “income exception to the annual legislate statutory another account- much it made the as it did when ing system, depreciation re- §to apply §§ capture provisions, liquidations.32 Or manner which it could basis modify allocated under 334.33 But in the absence legislative action, I can- to achieve similar not the Court’s join attempt results by the tax benefit rule.34 distorting accurately through the use inventory accounting
be more
reflected
supplies,”
No. 81-930
Respondent
such
Brief for United States
and for
81-485, pp.
bears mention that the
presently
No.
37-38.
It
Commissioner
expenditure
position
for feed that will
takes
an
be
in a
consumed
subsequent year will not
allowed unless three tests are
be
satisfied: it
be
must
(not
payment
deposit),
it must made for
purpose
a refundable
a business
avoidance,
merely
for tax
and the
deduction must not
result
material
Rul.
distortion
income. Rev.
1979-2 Cum. Bull. 210.
Reg. 1.162-12,
§1.162-12
Cf. Treas.
26 CFR
The courts have
position
divided over whether the Commissioner’s
is consistent with the
162(a).
v. United States,
Clement
present
Compare
495,580
217 Ct. Cl.
F.
*43
Dunn
(1978),
denied,
422
v. United
(1979);
2d
cert.
440 U.
907
S.
468
(SDNY 1979)
J.)
(Weinfeld,
Supp.
Commissioner),
F.
(supporting
991
the
(CA5
Frysinger Commissioner,
1981);
with
Commissioner
v.
These developed that has “tax rule” been federal called benefit 81-485, In No. the Court concludes that the income tax law. presented. application to the situation In No. rule has no operates rule it concludes that the to the detriment of 81-930, respect year. disagree I to its later tax with conclusions. with both
I 164(e) § interprets No. Court Internal 164(e). Revenue 26 U. S. C. ante, Code See propriety 392-395. It seems to me that the of a 1972deduc- 164(e) depended upon payment tion the Bank under by the Bank of a state tax on its shares. This Court’s deci- sion Lehnhausen v. Lake Shore Auto Parts Co., U. S. any rendered such tax nonexistent and deduc- Congress tion therefore unavailable. I sense no “focus of payment ... on the act of rather than on the ultimate use of Ante, funds the State.” at 394. The focus, instead, payment proved is on the of a tax. Events that there no application, tax. The situation, thus, one for the not the nonapplication, some benefit rule. question application
I therefore turn to the proper rule each of these cases. *44 the Anders construction of assuming §337
that section. But is (a point correct decided), wags this Court has I think the tail never dog §337, §336 if one light construes in rather than vice versa. Commissioner, Transportation, supra, Tennessee-Carolina Inc. Cf. at (“Section (Tannenwald, J., dissenting) designed to be a shield 337 was taxpayers against applying and not a sword to in other be used them Code”). sections of the appears applied deduction, to a to be as rule, The usual in with tax claimed, benefit, is a deduction this: Whenever particular year, taxpayer’s for a tax but fac- federal return year prove developments in tax the deduction to a later tual mistakenly part, in in whole or the deduc- asserted have been emerging part facts demonstrate of it which or that tion, regarded in as income to the is to be excessive, general concept (despite year. With that occa- the later tax sionally expressed differences between “transac- theoretical inconsistency,” parity” or “transactional on the one tional “recovery”) I a need for a have no hand, and, other, on the disagreement. basic
Regardless
presence
111in
the Internal Revenue
(1976
V),
Supp.
and
1954,
Code of
26 U. S. C.
ed.
acknowledged
judge-made. See,
that the tax benefit rule is
g.,
e.
of Federal Income Taxation
Mertens,
§7.34,
J.
Law
(J.
1981);
p.
Doheny
ed.
Bittker
Tax
Kanner,
rev.
&
It
Rule,
Benefit
26 UCLA L. Rev.
came
(1)
being, apparently,
into
because of two concerns:
a natural
against
reaction
an undeserved and otherwise unrecoverable
Government)
(2)
(by
perceived
benefit,
need,
payable
regular
pro
intervals,
because income taxes are
at
integrity
ap
mote the
of the annual tax return. Under this
proach,
justification,
if
in
a deduction is
with some
claimed,
year,
year,
an
even
earlier tax
it is to be allowed
though developments
year
in a later
show that the deduction
year
part.
the earlier
or
This
undeserved whole
impropriety
(concededly
impre
is then
an
counterbalanced
12) n.
manner,
cise
see
n.
ante,
reparative
gross
the inclusion of a
income in the later
item
year. See Burnet v.
Brooks
In No. Hillsboro National Bank, its 1972return, property took as a deduction amount of assessed state paid year by taxes the Bank on its held its stock share- this holders; deduction, were there such a tax, was author- by specific, provisions ized but unusual, nevertheless 164(e) § 164(e). § Code, of the 26 U. C.S. The Bank re- by ceived a benefit the deduction, for its net income and fed- accordingly. Similarly, eral income tax were reduced in No. Dairy, kept 81-930, Bliss Inc., which its books and filed its receipts returns cash and disbursements method, took deduction in its return for its fiscal ended June 30, purchased year. 1973,for cattle feed had That deduc- 162(a) tion expense was claimed aas business under 162(a). Dairy Code, 26 U. S. C. received a tax bene- fit, for its net income and federal for fiscal 1973 were reduced everything the deduction. far, Thus problem. clear and there is no
In the subsequent development, case, Bank’s however, namely, the final determination Court in this 1973 in years were 1947 Healy, and 1948. specifically Court noted the probable complicating factor of a statute S., limitations barrier. 345 U. at 284. supra, that the 1970amendment Illinois Lehnhausen, *46 imposition property prohibiting the of the state Constitution, justi- question, eliminated factual valid, taxes Dairy’s a And, case, for the 1972deduction. fication development, namely, postfiscal year liquidation corporation of such and the distribution feed as was of the 1973,to its with their shareholders, unconsumed on June ability consequent deduct, when the feed thereafter was adjusted amount of their basis in consumed, feed, similarly impropriety Dairy’s demonstrated the full- in fiscal 1973. cost deduction difficulty favoring
I some have no kind of “tax benefit” adjustment in favor of the Government for each of these situ- adjustment An ations. should be each case the made, improper beneficial deduction turned out to be and unde- premise proved served because its factual to be incorrect. Each thus was not entitled to the claimed deduc- portion tion, it, or a and this nonentitlement should be among obligations. reflected its tax difficulty This takes me, however, to the I encounter with unraveling concern, second is, or rectification of the situation. The Commissioner and the United States respective Dairy these cases insist that the Bank and the regarded receiving very should be next tax year premise prior year’s when the factual for the deduction proved position, to be I incorrect. could understand that if, in the interim, the bar of a statute of limitations had become why effective or if there were some other valid reason preceding year’s return could not be corrected and additional tax collected. But it seems to me that the better resolution particular of these two cases and others like them—and a produce complaint resolution that should little from the tax- payer necessary adjustment, to make whenever it can —is be origi- made, the tax for which the deduction was nally claimed. This makes the correction where the correc- tion is due and it makes the amount of net income for each year a true amount and one that accords with the facts, imprecise, fictional. This nor- structured, one that is by taxpayer’s filing accomplished mally either year, payment earlier with return for the an amended resulting or the Commissioner’s assertion tax, additional actually deficiency collection. This is the followed of a taxpayer’s thing time, all the for when a that is done kind of deficiency is asserted due to an over- return is audited and process equates filing with the deduction, the an stated amended return. Dairy’s particularly July acute. 2, 1973, case is On year, day Dairy the end of its fiscal
the second after pursuant adopted plan liquidation to 333 of the Code, requires adoption plan 333. That section U. S. C. of a *47 making filing, days, liquidation; and within 30 of writ- by qualified electing ten elections and the shareholders; liquidation effectuation of the distribution within a calen- (d). §§333(a), (c), dar month. and It seems obvious that the Dairy, management, its and its shareholders, the end of Dairy’s year certainly 1973fiscal on June and well be- filing year, fore the of its tax return for that fiscal all had con- developed July plan liquidation ceived and carry plan were resolved to out that with the benefits that they felt would be afforded it. Under these circum- carry apply stances, we the tax benefit rule far too it too strictly when we utilize the unconsumed in- feed to create (the Dairy July 1973), come for the for fiscal 1974 month decreasing instead of the deduction for the same feed fiscal Any integrity report- 1973. concern for the of annual tax ing should not demand I that much. thus would have the Dairy’s adjusted factually returns in a realistic and true man- inflexibly ner, rather than in accord with an administered tax benefit rule.
Much the same is to be said about the Bank’s case. decisive event, this Court’s decision Lehnhausen, occurred February 22, 1973,within the second month of the Bank’s year. place tax Indeed, it took before the Bank’s calen- dar again, return would be overdue. Here an ac- preferred over inaccurate should be return curate and 1973. for both 1972 returns particular my way two tax con- is the these
This, view, anything I resolved. see no need for be troversies should complex I than what have outlined. in their resolution more problem if the existed, if of limitations or course, a statute Of way prevented reparation to the Govern- some other facts might well be different. the cases and their resolution ment, my position simplistic, I if I realize is but doubt really judge-made intended, benefit rule at its simple origin, regarded applicable in situations of successive-tax-year presented in kind these cases. So understandably judge-made rule, ulti- conceived, often a mately carry us further than should. used judgment
I in each of and re- would vacate the these cases proceedings each for further consistent with this mand case analysis.