Government Argues Abandonment of Securities Resulted in Capital Loss

                           TABLE OF CONTENTS

On December 11, 2013, the Tax Court issued an opinion upholding the Commissioner's determination of income tax liability. (Doc. 23.) The Tax Court denied reconsideration on March 6, 2014 (Doc. 29) and issued a final decision on March 10, 2014. (Doc. 30). Taxpayer filed a timely notice of appeal on April 14, 2014. (Doc. 31.) I.R.C. § 7483; Fed. R. App. P. 13(a)(1). This Court has jurisdiction pursuant to I.R.C. § 7482(a)(1). Venue is proper in this Court because taxpayer's principal place of business and mailing address on the date it filed its Tax Court petition was in Pittsburg, Texas. (Doc. 9 at 12 ¶ 45.) I.R.C. § 7482(b).

Taxpayer timely petitioned for redetermination of a deficiency notice. (Doc. 1.) On December 11, 2013, the Tax Court issued an opinion upholding the determination of income tax liability. (Doc. 23.) After denying reconsideration (Doc. 29), the Tax Court issued its final decision. (Doc. 30). This appeal followed. (Doc. 31.)

B. Factual background

On October 5, 1999, Southern States exercised that election. (Doc. 9 at 4 ¶ 12.) Gold Kist then purchased the following securities for $98.6 million: 40,000 shares of Step-Up Rate Series B Cumulative Redeemable Preferred Stock from Southern States and 60,000 shares of Step-Up Rate Capital Securities, Series A from a Southern States trust. (Doc. 9 at 4-5 ¶¶ 12-15.) The Series B stock and Series A securities collectively are the securities at issue on appeal and are "securities" as defined by I.R.C. § 165(g)(2). (Doc. 9 at 5 ¶¶ 15-16.)

The securities provided for Southern States to make quarterly dividend payments to Gold Kist, but allowed it to defer payments under certain circumstances. (Doc. 9 at 5 ¶ 17.) In 2002, Southern States began to defer the dividend payments. (Doc. 9 at 5-6 ¶¶ 18-19.)

In early 2004, Southern States offered to redeem the securities for less than their purchase price. (Doc. 9 at 6 ¶¶ 20-21.) Gold Kist suggested a counteroffer price of $31.5 million. (Doc. 9 at 6 ¶ 22.) Southern States rejected the counteroffer and proposed to settle the securities for $20 million. (Doc. 9 at 7 ¶ 23.)

On May 24, 2004, Gold Kist's board of directors decided to reject Southern States' offer and, instead, to abandon the securities for no consideration. (Doc. 9 at 7 ¶ 24; Ex. 1-J at 4.) It chose abandonment to create "an ordinary tax loss for the full value of the securities." (Ex. 1-J at 4; Doc. 23 at 8.) On June 24, 2004, Gold Kist irrevocably abandoned the securities for no consideration or relief of liability on a non-negotiated basis via two letters. (Doc. 9 at 7-8 ¶¶ 25-27.) In the first letter, Gold Kist told Southern States that it was irrevocably abandoning, relinquishing, and surrendering all of its rights, title, and interest to the Series B stock and enclosed the stock certificate and a signed stock power. (Doc. 9 at 7-8 ¶ 26; Ex. 2-J.) In the second letter, Gold Kist told Wachovia, the registrar for the Series A securities, that it was irrevocably abandoning, relinquishing, and surrendering all of its rights, title and interest to the Series A securities and enclosed the certificate for the securities and a signed stock power. (Doc. 9 at 8 ¶ 27; Ex. 3-J.) Gold Kist requested that Wachovia take all necessary actions to remove Gold Kist's name and all other references to its ownership of the securities. (Doc. 9 at 8 ¶ 27; Ex. 3-J at 1.) On June 28, 2004, Southern States acknowledged that it and Wachovia had received the letters and agreed to take all necessary actions to carry out the abandonment of the securities. (Doc. 9 at 8 ¶ 28; Ex. 4-J.) After abandoning the securities, Gold Kist had no further interest in Southern States or the related trust. (Doc. 9 at 9 ¶ 31.)

Prior to abandoning the securities, Gold Kist valued the securities on its financial statements at $38.8 million. (Doc. 9 at 9 ¶ 29.) After abandoning the securities, it recorded a loss on its financial statements of $38.8 million. (Doc. 9 at 9 ¶ 29) Based on Southern States' offer, the securities were worth at least $20 million immediately prior to the abandonment. (Doc. 9 at 9 ¶ 30.)

On December 21, 2009, while taxpayer was in bankruptcy, the Commissioner issued a deficiency notice to taxpayer as successor-in-interest to Gold Kist with respect to Gold Kist's 2004 tax year. (Doc. 9 at 10-11 ¶ 37; Ex. 7-J.) The deficiency notice asserted that Gold Kist's loss for abandonment of the securities was a capital loss, rather than an ordinary loss. (Doc. 9 at 11 ¶ 38; Ex. 7-J at Sched. 1.) The deficiency notice also made several other adjustments which are not disputed in this case. (Doc. 9 at 11 ¶ 39; Ex. 7-J at Sched. 1.) Finally, the deficiency notice asserted a penalty under I.R.C. § 6662, which the Commissioner has conceded. (Doc. 9 at 11 ¶ 40; Ex. 7-J at Sched. 1.)

On June 29, 2012, the Tax Court requested briefing as to whether Treas. Reg. § 1.165-4 applied to the securities. (Doc. 16.) In response, the Commissioner argued that Treas. Reg. § 1.165-4 only applied to the Series B stock (Doc. 17 at 4-7), but that Treas. Reg. § 1.165-5(f) applied to the Class A securities (Doc. 17 at 3, 7-9). Taxpayer responded that Treas. Reg. §§ 1.165-4(a) and 1.165-5(f) provide the same rule for stock and securities, respectively (Doc. 18 at 5), but that the regulations did not bar taxpayers from taking abandonment losses (Id. at 4-8).

On May 20, 2013, the Tax Court ordered briefing as to whether I.R.C. § 1234A applied to the surrender. (Doc. 20.) In the order, the court stated that "[t]he parties have overlooked provisions outside of section 165, such as section 1234A, that require gains or losses from certain transactions to be treated as gains or losses from sales and/or exchanges of capital assets." (Doc. 20 at 2.) It explained that "section 1234A requires that a loss from the termination of a right with respect to property (other than a debt instrument) that is a capital asset in the hands of the taxpayer be treated as a loss from the sale of a capital asset." (Doc. 20 at 2 (footnote omitted).) The court stated that, based on the nature of the securities and accompanying rights, it appeared that Section 1234A required that the loss connected to the surrender of the securities "be treated as a loss from the sale of a capital asset regardless of whether the abandonment rendered them worthless." (Doc. 20 at 3.)

In his second supplemental brief, the Commissioner argued that Section 1234A applied, rendering the surrender a deemed sale or exchange of capital assets, subject to capital loss treatment. (Doc. 21.) The Commissioner explained that the securities incorporated inherent rights, a preference in the event of liquidation of Southern States, and an undivided beneficial interest in assets, all of which were terminated by the abandonment. (Doc. 21 at 5-6.) He further explained that "Section 1234A ensures character equivalence, i.e., that the absence of a sale or exchange (such as where property is abandoned) does not cause the character of gain or loss from a disposition to be altered." (Doc. 21 at 6.)

Taxpayer responded that Section 1234A only applies to the termination of derivative rights, and not the abandonment of capital assets directly owned by a taxpayer. (Doc. 22 at 1, 4-5, 8-9, 13, 19-20.) Taxpayer also argued that reading Section 1234A to cover the surrender would be inconsistent with certain Treasury and IRS issuances. (Doc. 22 at 25-29.)

On December 11, 2013, the Tax Court issued an opinion holding that Section 1234A applied to the surrender of the securities and associated rights, triggering capital-loss treatment. (Doc. 23.) The court noted that the parties agreed that the securities "are property and were capital assets in the hands of" Gold Kist. (Doc. 23 at 14.) It then explained that shares of stock "are intangible interests or rights that the owner has in the management, profits, and assets of a corporation" and that stock is a "chose in action" which "is a contract susceptible of ownership." (Doc. 23 at 14.) The Tax Court concluded that, under its plain statutory text, Section 1234A applied to the abandonment here. (Doc. 23 at 15-20.) As part of that analysis, the court rejected taxpayer's argument that Section 1234A only applied to derivative rights as inconsistent with the plain statutory text and not supported by the legislative history. (Doc. 23 at 17-26.) Finally, the Tax Court rejected taxpayer's arguments regarding allegedly inconsistent Treasury and IRS statements. (Doc. 23 at 26-29).

Taxpayer timely moved for reconsideration. (Doc. 24.) On March 6, 2014, the Tax Court denied reconsideration,³ explaining that reconsideration in the Tax Court is not available to rehash previously-raised arguments and that taxpayer primarily reiterated arguments already addressed in the court's opinion. (Doc. 29 at 2.) Thus, the Tax Court only made brief "comments" in reaction to the motion. (Doc. 29 at 2.) First, it stated that taxpayer's arguments "would require the Court to rewrite Section 1234A(1) by inserting the word 'contractual' before 'rights and obligations,'" in the statutory text, which the court refused to do. (Doc. 29 at 2.) Second, the court rejected taxpayer's argument that its interpretation of Section 1234A(1) makes Section 1234A(2) superfluous because the scope of Section 1234A(2) is expressly limited to "a section 1256 contract . . . not described in paragraph (1). . . ." (Doc. 29 at 2.) Finally, the Tax Court concluded that its holding does not conflict with I.R.C. § 165(g), reasoning that the statutes address different situations, depending on whether the securities in question had value when the taxpayer allegedly experienced its loss. (Doc. 29 at 3.)

This timely appeal followed. (Doc. 31.)

Recognizing that Southern States' offer was disadvantageous for tax purposes, Gold Kist rejected it. It then abandoned the securities for no consideration and claimed an ordinary loss of $98.6 million on its tax return, which substantially reduced its billion-dollar taxable income. The Tax Court, relying on I.R.C. § 1234A(1), held that the abandonment of the securities was taxable as a capital loss. Its determination was correct.

Section 1234A(1) provides that gain or loss attributable to the cancellation, lapse, expiration, or other termination of "a right or obligation (other than a securities futures contract . . .) with respect to property which is . . . a capital asset in the hands of the taxpayer" shall be treated as gain or loss from the sale of a capital asset. As the Tax Court correctly held, under a plain reading of its text, Section 1234A(1) applies to Gold Kist's surrender of the securities and accompanying rights, because it applies to rights "with respect to property." Generally and in the Internal Revenue Code, "property" has a broad meaning, incorporating the concept of rights, including inherent rights.

The facts of this case bear this out: the securities here gave Gold Kist numerous intangible rights, which were terminated when Gold Kist abandoned the securities. Contrary to taxpayer's argument, nothing in the statute limits its application to the termination of derivative or other separate contractual rights, and adopting taxpayer's narrow reading of Section 1234A(1) would require this Court to rewrite the statute to insert language never adopted by Congress.

Because the statutory text of Section 1234A is unambiguous, this Court need not consider the legislative history, but should rely on the plain meaning of the statute. But in all events, the legislative history supports the Commissioner's reading of Section 1234A and establishes that the purpose of Section 1234A is to prevent taxpayers from manipulating the rules in an attempt to elect ordinary-loss treatment for the termination of rights with respect to capital assets. This case provides a clear example of the kind of whipsaw that Congress targeted with both the original enactment of Section 1234A in 1981 and the 1997 amendment of Section 1234A, which expanded its coverage to all kinds of property.

Alternatively, Gold Kist's surrender of the securities and associated rights is properly treated as a deemed sale pursuant to I.R.C. § 165(g)(1), which provides that "if any security which is a capital asset becomes worthless during the taxable year, the loss resulting therefrom shall . . . be treated as a loss from the sale or exchange . . . of a capital asset." Under the ordinary meaning of the words in the statute, securities should be considered "worthless" under Section 165(g)(1) if they are either "valueless" or "useless" to the taxpayer. Here, by abandoning the securities, Gold Kist established that they were "useless" to it -- regardless of whether the securities continued to have economic "value" and could have been sold. The Court need not consider legislative history, given the unambiguous wording of the statute. Moreover, the legislative history to Section 165(g)(1) supports the conclusion that Congress intended that provision to prevent taxpayers from using the worthlessness of securities to avoid capital-loss treatment.

A. Statutory background regarding capital and ordinary losses

"[T]ax deductions are matters of legislative grace and must be narrowly construed. The taxpayer bears the burden of proving his entitlement to a particular deduction." Battelstein v. IRS, 631 F.2d 1182, 1185 (5th Cir. 1980); see also INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); Arevalo v. Commissioner, 469 F.3d 436, 440 (5th Cir. 2006). I.R.C. § 165(a) permits taxpayers to deduct "any loss sustained during the tax years." There are two overarching categories of losses allowable under Section 165(a): capital and ordinary losses. Azar Nut Co. v. Commissioner, 931 F.2d 314, 316 (5th Cir. 1991).⁴

A capital loss is a loss from the sale or exchange of a capital asset. I.R.C. § 1211(a). "There are two requirements for the capital gain and loss provisions to be applicable: (1) there must be a 'capital asset' or property that is treated like a capital asset under § 1231, and (2) there must be a 'sale or exchange.'" Yarbro v. Commissioner, 737 F.2d 479, 482 n.3 (5th Cir. 1984). It is undisputed that the Southern States securities constituted capital assets as defined in I.R.C. § 1221(a). (Doc. 11 at 13; Doc. 12 at 17.) This case, thus, addresses whether Gold Kist's surrender of the securities constituted a "sale or exchange."

This is not an academic question. "[T]he Internal Revenue Code . . . gives taxpayers a [tax] break on capital gains while restricting the tax benefits available from capital losses. Not surprisingly, then, taxpayers are wont to characterize their gains as capital and their losses as ordinary." Campbell Taggart, Inc. v. United States, 744 F.2d 442, 448 (5th Cir. 1984) (footnote omitted), abrogated on other grounds by Arkansas Best Corp. v. Commissioner, 485 U.S. 212 (1988).

Capital gains are typically subject to a lower tax rate than are ordinary gains, while capital losses (unlike ordinary losses) are subject to two specific limitations. Id. at 448 n.16. First, under I.R.C. § 1211(a), corporations' capital losses "shall be allowed only to the extent of gains from such sales or exchanges." In other words, capital losses cannot be offset against ordinary income. Second, I.R.C. § 1212(a)(1) limits corporations' ability to carry capital losses to other tax years. Thus, corporations may only use capital losses to offset capital gains in the current tax year or a limited number of additional tax years. Here, Gold Kist chose to abandon the securities in an attempt to attain ordinary-loss treatment, thereby avoiding these limits to which it would have been subject had it accepted Southern States' counteroffer to redeem the securities for $20 million. ⁵ (Ex. 1-J at 4; Doc. 23 at 8.)

The satisfaction of the sale-or-exchange requirement does not depend on the taxpayer's receipt of consideration for the property. "In many situations, a taxpayer is treated under a particular provision of the Code as selling or exchanging property even though an actual sale or exchange has not taken place." 4 Mertens Law of Fed. Income Tax'n ¶ 22:9 (2014). Examples of provisions imposing sales-or-exchange treatment on various transactions include I.R.C. § 166(d)(1)(B) (nonbusiness debts that become worthless), I.R.C. § 311(b)(1) (distribution of appreciated property to a shareholder), I.R.C. § 331(a) (amounts received by shareholder as a distribution in complete liquidation of a corporation), I.R.C. § 1234(a)(1) (loss from failure to exercise an option ), and I.R.C. § 1235 (transfer of property consisting of all substantial rights in a patent by certain holders). See also 4 Mertens ¶ 22:9 (listing other examples).

In this case, the Commissioner has consistently argued that the abandonment constituted a statutory or deemed sale or exchange, triggering capital loss treatment.⁶ The Tax Court concluded that Section 1234A applied to the surrender of the securities, compelling capital-loss treatment of the ensuing loss. (Doc. 23 at 14-29.) As we explain below, the Tax Court's analysis is correct and should be affirmed. In the alternative, this Court should apply I.R.C. § 165(g), which under these facts, would likewise result in capital-loss treatment.⁷

B. The Tax Court correctly concluded that I.R.C. § 1234A applies to the surrender of the securities and associated rights, compelling capital-loss treatment

I.R.C. § 1234A provides:

Under its plain text, Section 1234A(1) applies to "a right or obligation . . . with respect to property which is (or on acquisition would be) a capital asset in the hands of the taxpayer. . . ." The parties agree that the securities were capital assets in Gold Kist's hands. (Doc. 11 at 13; Doc. 12 at 17.) See also I.R.C. § 1221(a) (defining "capital asset," as "property held by the taxpayer (whether or not connected with his trade or business)," subject to certain inapplicable exceptions). But the parties disagree as to whether Section 1234A(1) applies to termination of rights inherent in such capital assets, as well as to derivative rights, or applies only to derivative rights.

The term "property" in Section 1234A(1) incorporates the concept of rights, including inherent rights. As the Supreme Court has noted, "[a] common idiom describes property as a 'bundle of sticks' -- a collection of individual rights which, in certain combinations, constitute property." United States v. Craft, 535 U.S. 274, 278 (2002). As the Tax Court explained (Doc. 23 at 18), courts have used the phrase "rights with respect to" property as covering rights inherent in the property itself. In Craft, for example, the Supreme Court addressed whether a taxpayer possessed "property" or "rights to property" under the federal tax lien provision, I.R.C. § 6321, where the property in question was owned in tenancy by the entireties. It explained that the taxpayer's husband had numerous "rights with respect to the entireties property," including, inter alia, inherent rights, such as the rights to "use the property," "exclude third parties from it," enjoy "a share of income produced from it," and "sell the property with the respondent's consent and to receive half the proceeds from such a sale." 535 U.S. at 282-83 (emphasis added). Similarly, the Supreme Court has acknowledged that a person may control a corporation based on stock that he owned "and that with respect to which the right to vote was retained." United States v. Byrum, 408 U.S. 125, 149 n.33 (1972).

Indeed, "[a] share of stock has been defined to be a right which its owner has in the management, profits, and ultimate assets of the corporation; but he has no legal title to the profits or property of the corporation until a dividend is declared, and a division made on the dissolution of the corporation." Storrow v. Tex. Consolidated Compress & Mfg. Ass'n, 87 F. 612, 615 (5th Cir. 1898), rev'd on other grounds, 92F. 5 (5th Cir. 1899). See also Commissioner v. Scatena, 85 F.2d 729, 732 (9th Cir. 1936) (characterizing shares of stock as "the interest or right which the owner has in the management, profits and assets of a corporation," and "[t]hough incorporeal, they are nevertheless property"). Thus, "[i]n a very true sense, a stockholder of a corporation is an owner of an undivided interest in the properties of the corporation." Howbert v. Penrose, 38 F.2d 577, 579 (10th Cir. 1930). Put simply, the commonly understood meaning of "property" embodies both tangible and intangible bundles of rights.

Here, there were numerous intangible rights "with respect to" the Southern States securities, all of which were extinguished by the abandonment. For example, "[t]he Securities generally provided for quarterly dividend payments, provided that under certain circumstances the dividend payments could be unilaterally deferred by Southern States." (Doc. 9 at 5 ¶ 17.) The certificate for the Series B stock gave Gold Kist a "liquidation preference" and noted that there were other "designations, preferences, limitations, and relative rights" connected to the stock. (Ex. 2-J at 3.) Similarly, the certificate for the Series A securities noted that they provided "a preferred undivided beneficial interest in the assets" of the relevant Southern States trust, gave Gold Kist rights in the event of liquidation, and included certain "designations, rights, privileges, restrictions, preferences and other terms and provisions." (Ex. 3-J at 3). When Gold Kist surrendered the securities, it stated that it "irrevocably abandons, relinquishes, and surrenders all of its rights, title and interest" in them. (Ex. 2-J at 1; Ex. 3-J at 1.) Under the plain statutory text, Gold Kist's surrender of the securities (and all accompanying rights) falls within the coverage of Section 1234A.

Taxpayer challenges this plain-meaning interpretation of Section 1234A(1) (Br. 13-15) and asserts that Section 1234A(1) is "a look-through rule" that "narrowly . . . appl[ies] only to rights or obligations that derive their value from underlying property, which is (or would be on acquisition) a capital asset" (Br. 14 (footnote omitted)). Thus, taxpayer argues that Section 1234A(1) only applies to a "contractual or other derivative rights or obligations" that are separate from, rather than inherent in, an underlying capital asset. (Br. 15.) Notably, the words "contractual" and "derivative" do not appear anywhere in Section 1234A(1). Indeed, there are no limiting adjectives in the current version of Section 1234A(1). The only textual limits for Section 1234A(1) are that it does not apply to (1) a right or obligation that is "a securities futures contract, as defined in section 1234B"; (2) an I.R.C. § 1256 contract covered by I.R.C. § 1234A(2); or (3) "the retirement of any debt instrument." None of these exceptions supports the claim that Section 1234A(1) only applies to derivative rights or obligations, and not to rights inherent in property.

If Congress desired to make Section 1234A(1) solely a "look-through" provision or limit it only to separate derivative rights or obligations, it would have used specific language to signal that intent. Congress simply could have inserted the word "derivative" into the statute -- but it did not. Congress also could have structured Section 1234A(1) consistently with the two Internal Revenue Code provisions immediately adjacent to section 1234A, which actually are solely applicable to certain types of derivative instruments -- I.R.C. §§ 1234(a)(1) and 1234B(a)(1). I.R.C. § 1234(a)(1) provides that the character of gain or loss attributable to the sale, exchange, or lapse of an option contract "has the same character as the property to which the option relates." Similarly, I.R.C. § 1234B(a)(1) provides that the character of gain or loss attributable to the sale, exchange, or termination of a securities futures contract "has the same character as the property to which the contract relates." Thus, both Sections 1234(a)(1) and 1234B(a)(1) unambiguously apply only to derivative contracts.

But Congress did not include such language in Section 1234A(1). Thus, to achieve the narrow reading that taxpayer desires, this Court would need to insert language into Section 1234A(1) to limit it to separate derivative rights or obligations. However, as this Court has explained, "no principle of statutory interpretation grants us judicial license simply to rewrite statutory language by ascribing additional, material terms as suggested by appellant[ ]." Texaco, Inc. v. Duhe, 274 F.3d 911, 920 (5th Cir. 2001). Where, as here, "[n]othing in the statutory context requires a narrowing construction," the Supreme Court has held that courts "are not at liberty to rewrite the statute to reflect a meaning we deem more desirable" but "must give effect to the text Congress enacted." Ali v. Fed. Bur. of Prisons, 552 U.S. 214, 227-28 (2008).⁸

Taxpayer argues (Br. 15) that if, as the Tax Court stated, securities are rights that the owner has in the management, profits, and assets of a corporation (Doc. 23 at 14-15), then the underlying property is not, nor would be on acquisition, a capital asset. This argument is premised upon the assumption that I.R.C. § 1234A(1) is solely a look-through rule. As explained, supra, 25-28, it is not. Moreover, as the Tax Court explained, because "a taxpayer cannot incur gain or loss on the termination of a right or obligation that the taxpayer has not yet acquired . . . it is not the right or obligation with respect to property but the property itself that must be or on acquisition become a capital asset in the hands of the taxpayer." (Doc. 23 at 17.) Taxpayer's interpretation of Section 1234A would lead to the absurd result of having that provision apply only to the termination of a derivative that relates to another separate underlying capital asset, but not to the termination of a right or obligation that is itself a capital asset.

Section 1234A(2) applies the sale-or-exchange rule of Section 1234A to "a section 1256 contract (as defined in section 1256) not described in paragraph (1) which is a capital asset in the hands of the taxpayer." Because Section 1234A(2) explicitly excludes from its scope a Section 1256 contract described in Section 1234A(1), the Tax Court's reading of Section 1234A(1) does not render Section 1234A(2) redundant.

The original Section 1234A(2) was added to the Code by the Technical Corrections Act of 1982, Pub. L. No. 97-448, 96 Stat. 2365, § 105(e) (1983), in which Congress also expanded the definition of a "regulated futures contract" in I.R.C. § 1256 to include cash-settled contracts and expanded the definition of "termination" with respect to a Section 1256 contract to include termination by offset. Technical Corrections Act of 1982, § 105(b). Thus, I.R.C. § 1256(c)(1) treats an offset of an obligation or right with respect to a Section 1256 contract as a termination even though the contract still remains open, and the obligation or right is not actually extinguished. As the Tax Court correctly concluded, "Section 1234A(2) ensures that gain or loss from a deemed termination by offset will be treated as gain or loss from the sale of a capital asset and, therefore, is not superfluous." (Doc. 29 at 2.)

Taxpayer's argument that a repealed statute -- former I.R.C. § 1234A(3) -- renders I.R.C. § 1234A(1), as interpreted by the Tax Court, redundant, defies credulity. Former I.R.C. § 1234A(3), which applied the Section 1234A rule to "a securities futures contract (as so defined) which is a capital asset in the hands of the taxpayer," was added to the Internal Revenue Code in 2000. See Community Renewal Tax Relief Act of 2000, Pub. L. No. 106-554, § 401, 114 Stat. 2763. It was repealed in 2002, and the repeal was retroactive to December 21, 2000, the date that Section 1234A(3) first became effective. See Job Creation & Worker Assistance Act of 2002, Pub. L. No. 107-147, §§ 412(d)(1)(A), (B)(1), (e), 116 Stat. 21, 53-54.⁹ Thus, not only was repealed Section 1234A(3) absent from the Code in 2004, the tax year in issue, but it was not effective for any tax year.

Moreover, when former Section 1234A(3) was enacted, I.R.C. § 1243A(1) was amended to exclude securities futures contracts from its scope. Community Renewal Tax Relief Act of 2000, § 401(b)(1). Thus, even if a repealed statute that was never in force is relevant to the correctness of the Tax Court's statutory interpretation (and it is not), the explicit exclusion of securities futures contracts from the scope of Section 1243A(1) prevents the Tax Court's interpretation of that section from rendering redundant the temporary addition of I.R.C. § 1234A(3) to the Code.

Furthermore, even if there were redundancy between Section 1234A(1), as read by the Commissioner and the Tax Court, and Section 1234A(2) and/or repealed Section 1234A(3), that redundancy would not justify reading Section 1234A(1) inconsistently with its plain language. The canon against redundancy or surplusage "is neither inviolable nor insurmountable." Adirondack Med. Ctr. v. Sebelius, 740 F.3d 692, 699 (D.C. Cir. 2014). Indeed, "[t]he canon is particularly unhelpful when both interpretative outcomes lead to some sort of surplusage." Id.

Here, taxpayer's reading of Section 1234A(1), if adopted, would render a portion of I.R.C. § 1234(a)(1) superfluous. Section 1234(a)(1) provides:

Under taxpayer's theory, Section 1234A(1) is also (and solely) a look-through provision, requiring capital-loss treatment after the termination of a contractual right if (and only if) that contractual right did or would have resulted in the taxpayer's acquiring capital assets under the contractual right. Put simply, taxpayer's reading of Section 1234A(1) renders the language in Section 1234(a)(1) regarding "loss attributable to failure to exercise" options superfluous. In a situation where either party's interpretation of a statute might lead to superfluity, the Court should choose the interpretation that is more consistent with the plain language of the statute and avoid the interpretation that would require the Court to rewrite the statute to insert limiting language. Adirondack Med. Ctr., 740 F.3d at 699. Under those principles, this Court should adopt the Commissioner's reading of Section 1234A(1), not taxpayer's.

In all events, "as one rule of construction against many, albeit an important one, the rule against redundancy does not necessarily have the strength to turn a tide of good cause to come out the other way." Gutierrez v. Ada, 528 U.S. 250, 258 (2000). Moreover, redundancy among statutory language is particularly permissible where, as here, the allegedly redundant language may be viewed as having "some clarifying value." Id. Thus, the Supreme Court has been unwilling to use the canon to preclude application of the plain meaning of a statute. See, e.g., Ali, 552 U.S. at 227-28; Gutierrez, 528 U.S. at 258. Ultimately,"[i]nadvertance or redundancy should not be assumed, but when the alternative is absurdity, the court seeking intent has no real choice." Frey v. United States, 558 F.2d 270, 274 (5th Cir. 1977). Here, the statutory text of Section 1234A unambiguously applies to Gold Kist's surrender of the securities. Taxpayer's redundancy argument does not justify rejecting the plain meaning of Section 1234A, or rewriting the statute to add limits that Congress did not include.

Moreover, and contrary to the entirety of taxpayer's legislative-history analysis, the Supreme Court "has never required that every permissible application of a statute be expressly referred to in its legislative history." Moskal v. United States, 498 U.S. 104, 111 (1990). Indeed, "it would be a strange canon of statutory construction that would require Congress to state in committee reports or elsewhere in its deliberations that which is obvious on the face of a statute. In ascertaining the meaning of a statute, a court cannot, in the manner of Sherlock Holmes, pursue the theory of the dog that did not bark." Harrison v. PPG Indus., 446 U.S. 578, 592 (1980).

Here, taxpayer improperly seeks to use legislative history to alter the plain meaning of the statute. But in all events, the legislative history supports the Tax Court's interpretation of Section 1234A, as it reflects Congress's long-standing efforts to prevent tax avoidance by taxpayers seeking to create fully deductible ordinary losses on dispositions of capital assets.

Congress enacted Section 1234A to prevent loss-character manipulation, like the manipulation that occurred here. According to the House report, Section 1234A was intended "to prevent tax-avoidance transactions designed to create fully-deductible ordinary losses on certain dispositions of capital assets, which if sold at a gain, would produce capital gains." H.R. Rep. No. 97-201, at 212 (1981), reprinted in 1981-2 C.B. 352, 480.¹⁰ It explained (Id.):

Taxpayer notes (Br. 24) that the committee highlighted forward contracts as an example of the targeted problem. See H.R. Rep. No. 97-201, at 213 ("Some of the more common of these tax-oriented ordinary loss and capital gain transactions involve cancellations of forward contracts for currency or securities"). But this was simply an example. Nothing in the legislative history indicates any intent to limit Section 1234A to such contracts. In all events, a statute's otherwise plain meaning should not be limited because the legislative history did not identify every possible application of the statute. Moskal, 498 U.S. at 111; Harrison, 446 U.S. at 592.

Taxpayer also incorrectly argues (Br. 21-25) that Congress's adoption of Section 1234A, rather than S. 626 (97th Cong., 1st Sess., 1981) ("the Moynihan bill"), supports a narrow reading of current Section 1234A. Section 6(a) of S. 626 would have added a new Internal Revenue Code provision stating that "'sale or exchange' when used with reference to any capital asset means any disposition of such asset."

To be sure, this provision would have applied to a broader group of dispositions and not merely to "the cancellation, lapse, expiration, or other termination" of a particular class of capital asset. Unlike the original Section 1234A, it would not have been limited to actively-traded "personal property." But, as taxpayer admits (Br. 23), there is no legislative history explaining why S. 626 was not adopted.¹¹ Taxpayer's claim that the decision to adopt Section 1234A, rather than S. 626, represented a decision to focus solely "on situations where taxpayers were entering into contracts regarding capital assets" (Br. 25) is sheer speculation.

Also incorrect is taxpayer's claim that, in rejecting S. 626, "Congress determined that it did not want to treat any disposition of a capital asset, including an abandonment, as a sale or exchange." (Original emphasis removed; new emphasis added.) There is no basis for the claim that "cancellation, lapse, expiration, or other termination" does not include abandonment; by abandoning property, a taxpayer terminates its rights with respect to that property. (Supra, 23-25.)

In the Deficit Reduction Act of 1984, P.L. No. 98-369, § 102(e)(9), 98 Stat. 494, 625 (1984), Congress amended Section 1234A to state that it "shall not apply to the retirement of any debt instrument (whether or not through a trust or other participation arrangement."¹³ The amendment was made in connection with the addition to the Code of Section 1271, entitled "Treatments of Amounts Received on Retirement or Sale or Exchange of Debt Instruments." See id., § 41.

Taxpayer incorrectly relies on the sparse legislative history of the amendment to Section 1234A(1) to try to bolster its interpretation of the original statute. (Br. 26-27.) The conference report states that Congress had retroactively "amend[ed] the provision of present law prescribing capital gain or loss treatment with respect to certain contract terminations to exclude from its application . . . the retirement of any debt instrument. . . ." H.R. Conf. Rep. No. 98-861, at 911, reprinted in 1984 U.S.C.C.A.N. 1445, 1599. Taxpayer also focuses (Br. 27) on the following language from the General Explanation of the Revenue Provisions of the Deficit Reduction Act of 1984, Joint Comm. Print, at 316 (98th Cong. 1984) ("Blue Book"):

As subsequent legislative history, these items are entitled to little weight. Consumer Product Safety Comm., 447 U.S. at 117 (citation omitted) (emphasizing "the oft-repeated warning that 'the views of a subsequent Congress form a hazardous basis for inferring the intent of an earlier one'"). See also Alfaro v. Commissioner, 349 F.3d 225, 230 (5th Cir. 2003) ("inasmuch as the Blue Book was prepared following the adoption of the statute that it explains, this publication is not binding authority").

Moreover, this legislative history does not bear the weight taxpayer places upon it. The 1984 legislative history can, at most, be read to show that Congress desired to ensure that termination of debt instruments was not covered by Section 1234A; it does not purport to alter the meaning of Section 1234A as enacted in 1981. Neither the 1984 conference report nor the Blue Book states that Section 1234A applies solely to derivative rights, as asserted by taxpayer.

Section 1234A(1) was amended because Congress was concerned that "to the extent that present law treats modification of property rights as not being a sale or exchange, present law effectively provides, in many cases, taxpayers with an election to treat the transaction as giving rise to capital gain, subject to more favorable rates than ordinary income, or an ordinary loss that can offset higher-taxed ordinary income and not be subject to limitations on use of capital losses." H.R. Rep. No. 105-148, at 453, reprinted at 1997 U.S.C.C.A.N. 678, 847.¹⁴ Congress illustrated current law with examples of court decisions holding that a disposition of property resulting from a lapse, cancellation or abandonment is not a sale or exchange of a capital asset, but produces ordinary income or loss. See, e.g., Fairbanks v. United States, 306 U.S. 436, 437 (1939) (gain realized on redemption of bonds before maturity taxed as ordinary income); Stoller v. Commissioner, 994 F.2d 855, 857 (D.C. Cir.), as amended, 3 F.3d 1576 (D.C. Cir. 1993) (in transaction preceding effective date of I.R.C. § 1234A, losses incurred in cancellation of forward contracts that formed a straddle were ordinary); National-Standard Co. v. Commissioner, 749 F.2d 369 (6th Cir. 1984)(transfer of foreign currency to discharge taxpayer's liability resulted in ordinary loss); Commissioner v. Pittston Co., 252 F.2d 344 (2d Cir. 1958) (payment for surrender of rights under output contract taxed as ordinary income). H.R. Rep. No. 105-148, at 451-342. Congress concluded that, because the amendment "extends to all types of property" the rule of Section 1234A, "[a] major effect of the Committee bill would be to remove the effective ability of a taxpayer to elect the character of gains and losses from certain transactions." Id. at 454.

Taxpayer contends (Br. 29-30) that Congress's examples show that Section 1234A applies only to derivative rights, and not to the inherent property rights arising from property ownership. Taxpayer's analysis again ignores the principle that a statute's interpretation should not be limited to examples cited in committee reports. Moskal, 498 U.S. at 111; Harrison, 446 U.S. at 592. Indeed, the committee report expressly labeled the applications as "examples." H.R. Rep. No. 105-148, at 454.

Further, as the Tax Court explained (Doc. 23 at 24-25), it is notable that one of the examples given for problematic court decisions was Fairbanks, 306 U.S. at 437, which dealt with bond redemption and, thus, dealt with termination of the rights inherent in the bond. As the Tax Court observed (Doc. 23 at 25), "The example of a redemption of a bond is most significant given that Congress had long since overturned the result in Fairbanks." The citation of Fairbanks as an example in the legislative history demonstrates that Congress was concerned about court decisions addressing termination of rights inherent in property, and not merely derivative rights.

Taxpayer asserts (Br. 31) that, if Congress had desired a broad reading of Section 1234A, "it necessarily must have chosen to expand the scope of Section 1234A to be as broad as (or nearly as broad as) the Moynihan Bill" from 1981. But this is mere speculation, and assumes that taxpayer is correct that Section 1234A is a "look-through" provision applicable only to derivative rights. Instead, both the plain language and legislative history support the Commissioner's reading of Section 1234A. Indeed, one of the primary abuses targeted by the amendment is present in this case; taxpayer seeks ordinary-loss treatment for a transaction that is economically equivalent to the sale or exchange of a capital asset. See H.R. Rep. No. 105-148, at 453.

Taxpayer relies (Br. 32-36) on the issuance in 2008 of Treas. Reg. § 1.165-5(i), which generally provides that "a security that becomes wholly worthless includes a security . . . that is abandoned and otherwise satisfies the requirements for a deductible loss under section 165." The regulation treats the loss from an abandoned security as a loss from the sale of a capital asset, unless the security is from an affiliated corporation as described in Section 165(g)(3). Id. According to taxpayer, there would have been no reason for Treasury to have promulgated this regulation if I.R.C. § 1234A treated losses from the abandonment of inherent property rights as capital losses, as the Commissioner contends in this case.

Taxpayer is mistaken. The regulation was necessary because I.R.C. § 165(g), which it interprets, does not uniformly treat losses from worthless securities as losses from the sale or exchange of a capital asset. Under I.R.C. § 165(g)(1) only losses resulting from the worthlessness of "any security which is a capital asset" are treated as losses from the sale or exchange of a capital asset. "Any security in a corporation affiliated with a taxpayer shall not be treated as a capital asset." I.R.C. § 165(g)(3).

Thus, Treas. Reg. § 1.165-5(i)(1) only treats the loss from an abandoned security as a loss from the sale or exchange of a capital asset "[i]f the abandoned security is a capital asset and is not described in section 165(g)(3) and paragraph (d) of this section (concerning worthless securities of certain affiliated corporations)." If the abandoned security is the security of an affiliated corporation described in I.R.C. § 165(g)(3), the loss from abandonment is treated as an ordinary loss. I.R.C. § 165(g)(3); Treas. Reg. § 1.165-5(d)(1). Thus, the adoption of Treas. Reg. § 1.165-5(i) does not cast doubt on the correctness of the Commissioner's interpretation of I.R.C.§ 1234A as applying to inherent property rights, as well as to derivative rights.

Taxpayer's reliance (Br. 36-40) on Rev. Rul. 93-80, 1993-2 C.B. 239, is also misplaced because that ruling addresses the character of the loss on abandonment of a partnership interest before the 1997 amendments to I.R.C. § 1234A(1). In 1993, Section 1234A(1) applied only to "[g]ain or loss attributable to the cancellation . . . or other termination with respect to personal property (as defined in [I.R.C. § ] 1092(d)(1). . . ." 26 U.S.C. § 1234A(1) (1993 ed.). Section 1092(d)(1) defined "personal property" as "any personal property of a type which is actively traded." Because a partnership interest generally is not "a type [of personal property] which is actively traded," Section 1234A(1) was irrelevant to the partnership interests considered in the revenue ruling and was, therefore, not considered therein. Thus, the IRS ruled that when a partnership interest is abandoned, any resulting loss is a capital loss if there is an actual or deemed distribution to the partner, or if the transaction is otherwise in substance a sale or exchange; otherwise, the loss is an ordinary loss.¹⁶ Because the scope of Section 1234A(1) was significantly expanded in 1997 to encompass all property, Revenue Ruling 93-80 has no bearing on this case.

Taxpayer's claim (Br. 38 & n.125) that it "should be entitled to rely on the IRS's guidance on the application of the law regarding the abandonment of a capital asset" is also flatly contradicted by the IRS's express warning that taxpayers and others are "cautioned to determine whether a revenue ruling or revenue procedure on which they seek to rely has been revoked, modified, declared obsolete, distinguished, clarified, or otherwise affected by subsequent legislation, treaties, regulations, revenue rulings, revenue procedures or court decisions." Rev. Proc. 89-14, § 7.01(5), 1989-1 C.B. 814, 815. Because subsequent legislation expanded Section 1234A(1) to include all property, and because Rev. Rul. 93-80 addresses a partnership interest, taxpayer had no grounds to rely on Rev. Rul. 93-80. O'Shaughnessy v. Commissioner, 332 F.3d 1125, 1130 (8th Cir. 2003).

Finally, taxpayer cites nothing to support its claim (Br. 37, 39) that the IRS was somehow obligated to disavow Rev. Rul. 93-80 after the statutory amendment to Section 1234A(1). Rather, as the Tax Court explained (Doc. 23 at 27), "[t]he Commissioner is under no duty to assert a particular position as soon as the statute authorizes such an interpretation."¹⁷Dickman v. Commissioner, 465 U.S. 330, 343 (1984); Dresser Indus. v. United States, 238 F.3d 603, 609 (5th Cir. 2001).

Finally, taxpayer relies (Br. 41) on Rev. Rul. 2009-13, 2009-1 C.B. 1029. In that ruling, the IRS addressed, inter alia, the tax consequences of the taxpayer's surrender of a life insurance contract for its cash surrender value of $78,000 when the taxpayer had paid total insurance premiums of $64,000. The IRS concluded that the taxpayer recognized $14,000 in ordinary income ($78,000 minus $64,000). In concluding that the income was ordinary income, rather than capital gains, the IRS relied on I.R.C. § 61(a)(10), which requires the inclusion in gross income of "[i]ncome from life insurance and endowment contracts." 2009-1 C.B. at 1029. The IRS added, "Section 1234A, originally enacted in 1981, does not change this result." Id. Unlike the situation in Revenue Ruling 2009-13, Gold Kist did not receive money as a substitute for ordinary income when it abandoned the securities. Thus, Revenue Ruling 2009-13 is inapposite.

C. Even if I.R.C. § 1234A(1) is inapplicable, the surrender of the securities and associated rights is properly treated as a deemed sale or exchange pursuant to I.R.C. § 165(g), likewise compelling capital-loss treatment

Both I.R.C. § 165 and the relevant Treasury Regulations contain special rules for losses connected to securities. I.R.C. § 165(g)(1) states that "[i]f any security which is a capital asset becomes worthless during the taxable year, the loss resulting therefrom shall, for purposes of this subtitle, be treated as a loss from the sale or exchange, on the last day of the taxable year, of a capital asset."¹⁸ The parties have stipulated that the Southern States securities were "securities" for purposes of Section 165(g), pursuant to Section 165(g)(2). (Doc. 9 at 5 ¶ 16.) Thus, the question whether Section 165(g)(1) applies to Gold Kist's surrender of the securities turns on whether they were "worthless."¹⁹

In evaluating this question, we look first to the plain language of the statute, and specifically, to the "ordinary meaning" of "worthless." Soliman, 506 U.S. at 174; Kornman & Assocs., 527 F.3d at 451. Webster's 3d New International Dictionary, at 2637 (1993), identifies two primary definitions for "worthless": "lacking value or material worth: VALUELESS" or "of no value, use, or profit: USELESS." Taxpayer focuses (Br. 9-10) on securities' material worth at the time of the abandonment, i.e., that they were not "valueless." But this analysis ignores that the act of surrendering the securities established that they were worthless to Gold Kist under the second of those primary meanings -- that the securities were of no "use" or "profit" to Gold Kist, i.e., "useless." Thus, based on the plain language of the statute and the ordinary meaning of "worthless," Section 165(g)(1) applies to taxpayer's surrender of the securities.²⁰

Since Section 165(g)(1) is unambiguous, there is no need to consider its legislative history. Tidewater, 565 F.3d at 303. But, in all events, the legislative history of Section 165(g)(1) supports reading the statute broadly. The statutory predecessor to Section 165(g)(1) was enacted in the Revenue Act of 1938, P.L. No. 75-554, § 23(g)(2), 52 Stat. 447, 461 (1938). The House committee report explains that, previously, "a loss sustained from securities becoming worthless" was deductible as an ordinary loss, while "a loss sustained from the sale or exchange of such securities as are capital assets" was deductible as a capital loss, subject to the limitations on capital losses. H.R. Rep. No. 75-1860, at 18, reprinted in 1939-1 C.B. (pt. 2) 728, 740. The committee concluded that "[t]his distinction in treatment is not satisfactory, since, in either case, the loss sustained by the taxpayer is a loss of capital and consequently should be treated similarly for tax purposes." Id.

The enactment of the predecessor to Section 165(g)(1) was intended to ensure that these losses of capital be treated similarly. H.R. Rep. No. 75-1860, at 18.²¹ Nothing in the legislative history indicates any intent to give the term "worthless" a narrow reading that would ignore one of the two primary meanings of that term. Indeed, reading the term "worthless" in Section 165(g)(1) to cover both of the primary meanings, so that securities that are abandoned are per se worthless, is consistent with the legislative intent of preventing similar economic losses from being treated differently.

Treating the surrender as a deemed sale or exchange, pursuant to I.R.C. § 165(g)(1), is also consistent with Treas. Reg. §§ 1.165-4 and 1.165-5(f), which limit the ways that a taxpayer may claim a loss connected to stock and securities. Treas. Reg. § 1.165-4(a) states that "[n]o deduction shall be allowed under section 165(a) solely on account of a decline in the value of stock owned by the taxpayer when the decline is due to a fluctuation in the market price of the stock or to other similar cause."²² It adds:

Further, treating Gold Kist's surrender of the securities as worthless pursuant to Section 165(g)(1) is also consistent with the case law applying that statute. Under Treas. Reg. § 1.165-1(b) and (d)(1), a deduction for worthlessness under Section 165 is allowable if there is a "closed and completed transaction[ ], fixed by identifiable events," establishing that the property is worthless in the year for which the deduction is claimed. Abandonment is such an identifiable event, constituting a closed and completed transaction establishing worthlessness. See, e.g., Proesel v. Commissioner, 77 T.C. 992, 1006 (1981); cf. Delk v. Commissioner, 113 F.3d 984 (9th Cir. 1997) (cancellation of shares established worthlessness).

Taxpayer argues (Br. 11 & nn.51-52) that under Echols v. Commissioner, 935 F.2d 703 (5th Cir.) ("Echols I"), rehearing denied,950 F.2d 209 (5th Cir. 1991) ("Echols II"), and Citron v. Commissioner, 97 T.C. 200 (1991), both this Court and the Tax Court have concluded that under I.R.C. § 165(a) "no sale or exchange occurs and a loss incurred is ordinary when a taxpayer abandons a capital asset for no consideration or relief of liability." Neither of these cases, however, addressed securities within the meaning of I.R.C. § 165(g)(2), and therefore did not, and could not, have addressed the standard for worthlessness of an abandoned security under Section § 165(g)(1). See Echols II, 950 F.2d at 210-11 (stating that availability of worthlessness deduction under Section 165(g) did not preclude worthlessness deduction for other property); Citron, 97 T.C. at 210 n.7 (noting that Section 165(g)(2) applies to "something other than a partnership interest, limited or general").

Furthermore, neither Echols I nor Echols II addressed how to characterize the loss at issue; rather, the question was whether a loss had occurred at all. See, e.g., Echols I, 935 F.2d at 704. This Court concluded that the taxpayers were entitled to deduct their loss based both on abandonment and worthlessness. Id. at 706-07. Neither Echols I nor Echols II addresses or forecloses the argument that the term "worthless" in Section 165(g)(1) applies to both valueless securities and securities whose uselessness has been established through the act of abandonment.

Similarly flawed is taxpayer's claim (Br. 11) that the Commissioner has "ruled that no sale or exchange occurs and a loss incurred is ordinary when a taxpayer abandons a capital asset for no consideration or relief of liability." The first item cited for this proposition is Rev. Rul. 93-80, which, like Echols and Citron, addresses abandonment of a partnership interest, and not securities subject to Section 165(g). (See supra, 50-52 (discussing Rev. Rul. 93-80).) The second cited item is the now-outdated version of IRS Publication 544, at 4 (2004), which stated that "[l]oss from abandonment of business or investment property is deductible as an ordinary loss, even if the property is a capital asset."²⁴ Such "Treasury publications . . ., which purport to provide a general explanation of the revenue laws, are simply guidelines for taxpayers and do not bind the Commissioner in subsequent litigation." CWT Farms, Inc. v. Commissioner, 755 F.2d 790, 803 (11th Cir. 1985) (applying Carpenter, 495 F.2d at 184).

AUGUST 2014

² The Commissioner filed proofs of claim for federal taxes, including taxes related to the deficiency notice. (Doc. 9 at 11-12 ¶ 42.) On July 8, 2010, the bankruptcy court abstained from determining the proofs of claim and ordered that they be resolved in accordance with final decisions issued by ordinary tax processes. (Doc. 9 at 13 ¶ 47; Ex. 8-J.) This appeal solely addresses the deficiency notice regarding Gold Kist's 2004 tax year.

³ The Tax Court also denied taxpayer's motion for full court review. (Doc. 28). Taxpayer did not appeal the denial of that motion.

⁴ Taxpayer assumes that Section 165(a) losses are presumptively ordinary. (Br. 9.) However, Section 165(a) losses can be capital, depending on the facts. See Treas. Reg. § 1.165-1(c)(3) (capital losses are allowable under Section 165(a), "but only to the extent" allowed in I.R.C. §§ 1211 and 1212).

⁵ Furthermore, had Gold Kist allowed Southern States to redeem the securities for $20 million, it would have had to subtract from its adjusted basis in the securities ($98.6 million) the amount realized in determining its loss. I.R.C. § 1001(a). Thus, it would have had a capital loss of $78.6 million, instead of the ordinary loss of $98.6 million claimed on its tax return. (Ex. 6-J at 1, 14.)

⁶ Thus, taxpayer is incorrect to claim that the Commissioner conceded that there was no sale or exchange in this case. (Br. 4.) Rather, the Commissioner acknowledged that Gold Kist did not "sell or exchange" the securities as that phrase is ordinarily understood (Doc. 13 at 8), but argued that abandonment of the securities constituted a deemed sale or exchange.

⁷ It is well-settled that a decision can be affirmed on any ground, whether relied on, or even considered, by the court below. United States v. Arthur Young & Co., 465 U.S. 805, 814 n.12 (1984) . See also Dandridge v. Williams, 397 U.S. 471, 475 n.6 (1970); Helvering v. Gowran, 302 U.S. 238, 245 (1937).

⁸ Taxpayer cites (Br. 14 n.60) CCA 200851051, 2008 WL 5268031, and CCA 200851052, 2008 WL 5268032, as supporting its "derivative" contract theory, but such documents may not be cited as precedent. I.R.C. § 6110(k)(3).

⁹ I.R.C. § 1234A(3) was added to the Code at the same time as I.R.C. § 1234B, which treated gain or loss attributable to the sale or exchange of securities futures contracts as gain or loss from "the sale or exchange of property which has the same character as the property to which the contract relates has in the hands of the taxpayer (or would have in the hands of the taxpayer if acquired by the taxpayer)." Community Renewal Tax Relief Act of 2000, § 401(a). When Congress repealed Section 1234A(3), it expanded the scope of Section 1234B to include the "sale, exchange, or termination" of a securities futures contract, providing look-through treatment for sales, exchanges, or terminations of securities futures contracts. Job Creation & Worker Assistance Act of 2002, § 412(d)(1)(B)(i).

¹⁰ Because the Senate report, S. Rep. No. 97-144, at 170-71, reprinted at 1981 U.S.C.C.A.N. 105, 266-67, is essentially the same as the House report, we quote solely from the House report.

¹¹ The sparse legislative history on S. 626 simply states that the reason for the proposed Section 6(a), like the reason for the ultimate adoption of Section 1234A, was to prevent taxpayers from manipulating the character of a disposition to avoid capital-loss or ordinary-gain treatment. Background on Commodity Tax Straddles & Expl. of S. 626, Joint Comm. Report (97th Cong., 1st Sess., June 12, 1981).

¹² We acknowledge that the conference report states that "[s]ettlement or other termination of a contract results in capital gain or loss notwithstanding the absence of a sale or exchange only if the contract is with respect to personal property that would be a capital asset in the hands of the taxpayer" and that, under the amendment, capital loss would apply to any regulated futures contract that was a capital asset. H.R. Conf. Rep. No. 97-986, at 26, reprinted at 1982 U.S.C.C.A.N. 4203, 4214. This language, however, was only addressing cash-settled regulated futures contracts and was not an attempt to re-define the scope of Section 1234A(1). Moreover, such subsequent legislative history should not be used to alter the understanding of a previously enacted statute. Consumer Product Safety Comm. v. GTE Sylvania, 447 U.S. 102, 118 (1980).

¹³ The Deficit Reduction Act of 1984, P.L. No. 98-369, § 102(e)(4), also amended Section 1234A(2) to substitute the term "section 1256 contract" for the term "regulated futures contract."

¹⁴ Because the Senate report, S. Rep. No. 105-33, at 132-36 (1997), is essentially the same as the House report, we quote solely from the House report.

¹⁵ Taxpayer asserts (Br. 32 n.109) that one Tax Court case, Alami El Moujahid v. Commissioner, T.C. Memo. 2009-42, 2009 WL 435981,*14-*16 (2009), held that "the loss on the abandonment of stock and an intangible asset is an ordinary loss under Section 165(a)." But the Tax Court simply held, Id. at *16, that the taxpayer in question was entitled to an "abandonment loss" under Section 165(a) and did not address the character of that loss.

¹⁶ Section 165(g) does not apply to a partnership interest.

¹⁷ Taxpayer also notes (Br. 38) that certain IRS documents, such as IRS CCA 200637032, 2006 WL 2644610, continued to cite Rev. Rul. 93-80 after the 1997 amendments to I.R.C. § 1234A(1). But such "a written determination may not be used or cited as precedent." I.R.C. § 6110(k)(3). The training manual cited by taxpayer -- Partnership -- Audit Technique Guide -- Chapter 7 -- Dispositions of Partnership Interest (Rev. 3/2008) -- is also not binding on the Commissioner. See Carpenter v. United States, 495 F.2d 175, 184 (5th Cir. 1974).Furthermore, both documents are consistent with the Commissioner's position in this case. CCA 200637032 simply describes Rev. Rul. 93-80 as providing that capital loss treatment applies to the abandonment of a partnership interest if sale-or-exchange treatment applies. Similarly, the training manual cites Rev. Rul. 93-80 as an example of a deemed sale or exchange in the context of abandonment.

¹⁸ As explained, supra, 50, I.R.C. § 165(g)(3) provides an exception for securities in certain affiliated corporations.

¹⁹ Taxpayer largely ignores this argument on appeal, instead seeking to incorporate arguments from its trial court briefs. (Br. 9 & nn.45-46.) However, "appellate briefs may not incorporate other documents by reference." Albrechtsen v. Bd. of Regents of Univ. of Wisc. Sys., 309 F.3d 433, 436 (7th Cir. 2002). Indeed, "argument by incorporation, such as by referring to a summary judgment memoranda for legal analysis is a violation of Fed. R. App. P. 28(a)(6)." Monsanto Co. v. Scruggs, 459 F.3d 1328, 1335 (Fed. Cir. 2006) (finding waiver).

²⁰ As noted, supra, 49-50, by regulation, securities abandoned after March 12, 2008, are treated as wholly worthless for purposes of I.R.C. § 165(g). Treas. Reg. § 1.165-5(i). Treasury regulations are entitled to Chevron deference. Mayo Found. for Med. Educ. & Research v. United States, 131 S. Ct. 704, 714 (2011).

²¹ The Senate committee report, S. Rep. No. 75-1567, at 13-14 (1938), only briefly discussed the provision, suggesting that the provision be limited to individual taxpayers. This amendment was rejected at conference. See H.R. Conf. Rep. No. 75-2330, at 35 (1938).

²² "Stock" for purposes of this regulation is defined as "a share of stock in a corporation or a right to subscribe for, or to receive, a share of stock in a corporation." Treas. Reg. § 1.165-4(d).

²³ Taxpayer asserts (Br. 2 n.11) that, in the briefing below, "[t]he parties agreed that Treas. Reg. § 1.165-4 was not applicable and that the classification of the Securities as stock or non-stock was not relevant." This is only partially correct. The Commissioner stated that Treas. Reg. § 1.165-4(a) applied to the Series B stock (Doc. 17 at 6), but both parties agreed that Treas. Reg. § 1.165-5(f) has the same effect and applies to "securities" (Id. at 3-4; Doc. 18 at 5).

²⁴ The current version of Publication 544, at 5 (2013) now states: "Loss from abandonment of business or investment property is deductible as a loss. A loss from an abandonment of business or investment property that is not treated as a sale or exchange generally is an ordinary loss." (Emphasis added.)