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Corporation Argues Loss from Abandonment of Securities Was Ordinary

JUN. 30, 2014

Pilgrim's Pride Corp. et al. v. Commissioner

DATED JUN. 30, 2014
DOCUMENT ATTRIBUTES
  • Case Name
    PILGRIM'S PRIDE CORPORATION, SUCCESSOR IN INTEREST TO PILGRIM'S PRIDE CORPORATION OF GEORGIA, FORMERLY KNOWN AS GOLD KIST, INCORPORATED, SUCCESSOR IN INTEREST TO GOLD KIST, INCORPORATED AND SUBSIDIARIES, Petitioner-Appellant v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee
  • Court
    United States Court of Appeals for the Fifth Circuit
  • Docket
    No. 14-60295
  • Authors
    Albaral, Robert H.
    Schroeder, Todd A.
  • Institutional Authors
    Baker & McKenzie LLP
  • Cross-Reference
    Appealing Pilgrim's Pride Corp. v. Commissioner, 141 T.C. No.

    17 (2014) 2013 TNT 239-17: Court Opinions.

    Government Brief in Pilgrim's Pride Corp. v. Commissioner, No.

    14-60295 (2014) 2014 TNT 163-13: Justice Department Briefs.
  • Code Sections
  • Subject Area/Tax Topics
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2014-20666
  • Tax Analysts Electronic Citation
    2014 TNT 163-14

Pilgrim's Pride Corp. et al. v. Commissioner

 

IN THE UNITED STATES COURT OF APPEALS

 

FOR THE FIFTH CIRCUIT

 

 

ON APPEAL FROM THE UNITED STATES TAX COURT

 

 

BRIEF OF APPELLANT, PILGRIM'S PRIDE CORPORATION

 

 

BAKER & MCKENZIE LLP

 

Robert H. Albaral

 

Todd A. Schroeder

 

2300 Trammell Crow Center

 

2001 Ross Avenue

 

Dallas, Texas 75201

 

(214) 978-3000

 

ATTORNEYS FOR APPELLANT,

 

PILGRIM'S PRIDE CORPORATION

 

 

CERTIFICATE OF INTERESTED PERSONS

 

 

The undersigned counsel of record certifies that the following listed persons and entities as described in the fourth sentence of Rule 28.2.1 have an interest in the outcome of this case. These representations are made in order that the judges of this court may evaluate possible disqualification or recusal.

 

Parties:

 

 

Petitioner -- Appellant:

 

 

Pilgrim's Pride Corporation, Successor in Interest to Pilgrim's Pride

 

Corporation of Georgia, formerly known as Gold Kist, Incorporated,

 

Successor in Interest to Gold Kist, Incorporated and Subsidiaries

 

 

Respondent -- Appellee: Commissioner of Internal Revenue

 

 

Attorneys:

 

 

For Petitioner -- Appellant:

 

Robert H. Albaral

 

Todd A. Schroeder

 

Baker & McKenzie LLP

 

2300 Trammell Crow Center

 

2001 Ross Avenue

 

Dallas, Texas 75201

 

 

For Respondent -- Appellee:

 

 

Gilbert S. Rothenberg, Chief, Appellate

 

Section, Tax Division,

 

United States Department of Justice

 

P.O. Box 502

 

Washington, DC 20044

 

 

William J. Wilkins, Chief Counsel,

 

Internal Revenue Service

 

1111 Constitution Ave., N.W.

 

Washington, DC 20224

 

 

Kathryn Keneally, Assistant Attorney General

 

United States Department of Justice

 

Tax Division

 

601 D Street, N.W.

 

P.O. Box 502

 

Washington, DC 20044

 

 

Jennifer Marie Rubin

 

United States Department of Justice

 

Tax Division, Appellate Section

 

P.O. Box 502

 

Washington, DC 20044

 

 

Parent Corporation/Publicly Held Corporation that Owns 10% or More of Appellant's Stock

JBS USA Holdings, Inc. ("Holdings") directly owns approximately 75.5% of Appellant's stock. Holdings is an indirect, wholly-owned subsidiary of JBS S.A., a Brazilian company whose common shares are listed on the Novo Mercado segment (the highest level of corporate governance requirements) of the São Paulo stock exchange, BM&F BOVESPA (Bolsa de Valores, Mercadorias e Futuros de São Paulo).

Robert H. Albaral

 

Attorney of Record for Appellant

 

STATEMENT REGARDING ORAL ARGUMENT

 

 

Appellant (hereinafter "Pilgrim's Pride")1 respectfully submits, pursuant to 5th Cir. R. 28.2.3, that oral argument in this case would be helpful to explain the law regarding the abandonment of capital assets and to answer any questions from the Court regarding the Tax Court's incorrect conclusions of law; specifically, its conclusion, raised sua sponte, that 26 U.S.C. § 1234A(1) applies to a loss sustained on the abandonment of stock or securities, rather than 26 U.S.C. § 165(a), which expressly governs deductions for any loss sustained that is not compensated for by insurance or otherwise.

                       TABLE OF CONTENTS

 

 

 CERTIFICATE OF INTERESTED PERSONS

 

 

 STATEMENT REGARDING ORAL ARGUMENT

 

 

 STATEMENT OF JURISDICTION

 

 

 STATEMENT OF THE ISSUE

 

 

 STATEMENT OF THE CASE

 

 

      A. Course of Proceedings and Disposition in the Court Below

 

 

      B. Statement of Facts

 

 

 SUMMARY OF THE ARGUMENT

 

 

 ARGUMENT AND AUTHORITIES

 

 

      A. Standard of Review

 

 

      B. Pilgrim's Pride's Loss on the Abandonment of the Securities

 

         is an Ordinary Loss under the General Rule Set Forth in Section

 

         165(a)

 

 

      C. Section 1234A(1) Does Not Apply to Pilgrim's Pride's Loss on

 

         the Abandonment of the Securities

 

 

           1. By its plain terms, Section 1234A(1) does not apply to

 

              the abandonment of the Securities

 

 

           2. When the statute is read as a whole, it is likewise

 

              clear that Section 1234A(1) does not apply to the

 

              abandonment of the Securities

 

 

           3. The legislative history to Section 1234A also

 

              demonstrates that Congress intended for Section 1234A(1) to

 

              be limited in scope

 

 

      D. Treasury's and the IRS's Position, Prior to Responding to the

 

         Sua Sponte Order, Has Consistently Been That Section 1234A(1)

 

         Does Not Apply to the Abandonment of Intangible Property

 

 

           1. Treas. Reg. § 1.165-5(i)

 

 

           2. Revenue Ruling 93-80

 

 

           3. Revenue Ruling 2009-13

 

 

      E. The Tax Court Misinterpreted the Legislative History to

 

         Section 1234A and Placed Undue Emphasis on the Reference to

 

         Fairbanks v. United States

 

 

 CONCLUSION

 

 

 CERTIFICATE OF SERVICE

 

 

 CERTIFICATE OF SERVICE

 

 

 CERTIFICATE OF COMPLIANCE

 

 

 ECF CERTIFICATION

 

 

 ADDENDUM STATUTES AND REGULATIONS

 

 

                      TABLE OF AUTHORITIES

 

 

 CASES

 

 

 Alami El Moujahid v. Comm'r, T.C. Memo 2009-42

 

 

 Arkansas Best v. Comm'r, 485 U.S. 212 (1988)

 

 

 Billy Rose's Diamond Horseshoe, Inc. v. United States, 448

 

 F.2d 549 (2d Cir. 1971)

 

 

 Boehm v. Comm'r, 326 U.S. 287 (1945) 10

 

 

 Burnett Ranches, Ltd. v. United States, No. 13-10403, 2014

 

 U.S. App. LEXIS 9545 (5th Cir. 2014)

 

 

 Citron v. Comm'r, 97 T.C. 200 (1991)

 

 

 Conn. Nat'l Bank v. Germain, 503 U.S. 249 (1992)

 

 

 Crane v. Comm'r, 331 U.S. 1 (1947)

 

 

 Doe v. United States, 398 F.3d 686 (5th Cir. 2005)

 

 

 Dolan v. U.S. Postal Serv., 546 U.S. 481 (2006)

 

 

 Duke v. Univ. of Tex., 663 F.2d 522 (5th Cir. 1981)

 

 

 Echols v. Comm'r, 935 F.2d 703 (5th Cir. 1991)

 

 

 Echols v. Comm'r, 950 F.2d 209 (5th Cir. 1991)

 

 

 Estate of Delaune v. United States, 143 F.3d 995 (5th Cir.

 

 1998)

 

 

 Estate of McLendon v. Comm'r, 135 F.3d 1017 (5th Cir.

 

 1998)

 

 

 Fairbanks v. United States, 306 U.S. 436 (1939)

 

 

 Fed. Deposit Ins. Corp. v. Meyer, 510 U.S. 471 (1994)

 

 

 Gannon v. Comm'r, 16 T.C. 1134 (1951), acq., 1951-2

 

 C.B. 1

 

 

 Gray v. United States, 553 F.3d 410 (5th Cir. 2008)

 

 

 Herrera v. Comm'r, 544 Fed. Appx. 592 (5th Cir. 2013)

 

 

 Kashanchi v. Tex. Commerce Med. Bank, N.A., 703 F.2d 936 (5th

 

 Cir. 1983)

 

 

 Old Colony R.R. Co. v. Comm'r, 284 U.S. 552 (1932)

 

 

 Phillips v. Comm'r, 114 T.C. 115 (2000)

 

 

 Rauenhorst v. Comm'r, 119 T.C. 157 (2002)

 

 

 Silco, Inc. v. United States, 779 F.2d 282 (5th Cir. 1986)

 

 

 Sirbo Holdings, Inc. v. Comm'r, 509 F.2d 1220 (2d Cir. 1975)

 

 

 U.S. Freight Co. v. United States, 422 F.2d 887 (Ct. Cl. 1970)

 

 

 United States v. Am. Trucking Ass'ns, Inc., 310 U.S. 534

 

 (1940)

 

 

 United States v. Home Concrete & Supply, LLC, 132 S. Ct. 1836

 

 (2012)

 

 

 United States v. Ron Pair Enters., Inc., 489 U.S. 235 (1989)

 

 

 Xilinx, Inc. v. Comm'r, 598 F.3d 1191 (9th Cir. 2010)

 

 

                    STATUTES AND REGULATIONS

 

 

 11 U.S.C. § 362(a)(8)

 

 

 26 U.S.C. § 1 et seq

 

 

 26 U.S.C. § 165(a)

 

 

 26 U.S.C. § 165(b)

 

 

 26 U.S.C. § 165(c)

 

 

 26 U.S.C. § 165(d)

 

 

 26 U.S.C. § 165(e)

 

 

 26 U.S.C. § 165(f)

 

 

 26 U.S.C. § 165(g)

 

 

 26 U.S.C. § 165(g)(1)

 

 

 26 U.S.C. § 165(g)(3)

 

 

 26 U.S.C. § 165(h)

 

 

 26 U.S.C. § 165(i)

 

 

 26 U.S.C. § 165(j)

 

 

 26 U.S.C. § 165(k)

 

 

 26 U.S.C. § 165(l)

 

 

 26 U.S.C. § 165(m)

 

 

 26 U.S.C. § 741

 

 

 26 U.S.C. § 1011

 

 

 26 U.S.C. § 1092(d)(1)

 

 

 26 U.S.C. § 1221(a)

 

 

 26 U.S.C. § 1234A

 

 

 26 U.S.C. § 1234A(1)

 

 

 26 U.S.C. § 1234A(2)

 

 

 26 U.S.C. § 1234A(3)

 

 

 26 U.S.C. § 1256

 

 

 26 U.S.C. § 1256(b)(1)

 

 

 26 U.S.C. § 1271

 

 

 26 U.S.C. § 6213(a)

 

 

 26 U.S.C. § 6213(f)(1)

 

 

 26 U.S.C. § 7482(a)(1)

 

 

 26 U.S.C. § 7482(b)(1)(B)

 

 

 26 C.F.R. § 1.0-1 et. seq.

 

 

 26 C.F.R. § 1.165-5(i)

 

 

 26 C.F.R. § 1.165-5(i)(1)

 

 

 26 C.F.R. § 1.165-5(i)(2)

 

 

                       OTHER AUTHORITIES

 

 

 Fed. R. App. P. 13(a)(1)(A)

 

 

 Tax Court Rule 122

 

 

 Tax Court Rule 190(a) 1

 

 

 Consolidated Appropriations Act, 2001, Pub. L. No. 106-554, §

 

 1(a)(7) (Title IV, § 401(b)), 114 Stat. 2763 (2000)

 

 

 Deficit Reduction Act of 1984, Pub. L. No. 98-369, § 101(b), 98

 

 Stat. 494 (1984)

 

 

 Deficit Reduction Act of 1984, Pub. L. No. 98-369, § 102(a)(2),

 

 98 Stat. 494 (1984)

 

 

 Deficit Reduction Act of 1984, Pub. L. No. 98-369, § 102(e)(4),

 

 98 Stat. 494 (1984)

 

 

 Deficit Reduction Act of 1984, Pub. L. No. 98-369, § 102(e)(9),

 

 98 Stat. 494, 625 (1984)

 

 

 Economic Recovery Tax Act of 1981, Pub. L. No. 97-34, § 507(a),

 

 95 Stat. 172 (1981)

 

 

 Job Creation and Worker Assistance Act of 2002, Pub. L. No. 107-147,

 

 § 412(d)(1), 116 Stat. 21 (2002)

 

 

 Revenue Act of 1934, § 117(f), 28 Stat. 680, 714-175 (1934)

 

 

 Revenue Act of 1942, Pub. L. No. 77-753, § 123(a)(1), 56 Stat.

 

 798 (1942)

 

 

 Taxpayer Relief Act of 1997, Pub. L. No. 105-34, § 1003(a), 111

 

 Stat. 788 (1997)

 

 

 Technical Corrections Act of 1982, Pub. L. No. 97-448, §

 

 105(c)(5)(A), 96 Stat. 2365 (1983)

 

 

 Technical Corrections Act of 1982, Pub. L. No. 97-448, § 105(e),

 

 96 Stat. 2365 (1983)

 

 

 Commodity Straddles Tax Act of 1981, S. 626, 97th Cong., § 6,

 

 (1981)

 

 

 Economic Recovery Tax Act of 1981, H.J. Res. 266, 97th Cong. §

 

 507(a) (1981)

 

 

 H.R. Rep. No. 105-148 (1997)

 

 

 H.R. Rep. No. 98-861, 87 Cong. Rec. 130, H 6617 (1984) (Conf. Rep.)

 

 

 H.R. Rep. No. 97-794 (1982)

 

 

 S. Rep. No. 105-33 (1997)

 

 

 S. Rep. No. 97-144 (1981)

 

 

 Commodity Tax Straddles: Hearing Before the Subcomm. on Taxation

 

 and Debt Mgmt. and the Subcomm. on Energy and Agric.

 

 Taxation of the Comm. on Fin. of the U.S. Senate, 97th Cong. 44

 

 (1981) (Background on Commodity Tax Straddles and Explanation of S.

 

 626)

 

 

 Commodity Tax Straddles: Hearing Before the Subcomm. on Taxation

 

 and Debt Mgmt. and the Subcomm. on Energy and Agric. Taxation of the

 

 Comm. on Fin. of the U.S. Senate, 97th Cong. 44 (1981) (statement

 

 of Hon. John E. Chapoton, Assistant Sec'y for Tax Policy)

 

 

 Staff of Joint Comm. On Taxation, General Explanation of the Revenue

 

 Provisions of the Deficit Reduction Act of 1984 (1984), JCS-41-84.

 

 

 T.D. 9386, 73 Fed. Reg. 13124 (Mar. 12, 2008)

 

 

 Prop. Treas. Reg. § 1.165-5(i), 72 Fed. Reg. 41468 (July 30,

 

 2007)

 

 

 Rev. Rul. 2009-13, 2009-1 C.B. 1029

 

 

 Rev. Rul. 93-80, 1993-2 C.B. 239

 

 

 Rev. Rul. 64-51, 1964-1 C.B. 322

 

 

 I.R.S. Chief Couns. Adv. 200851052 (Oct. 27, 2008)

 

 

 I.R.S. Chief Couns. Adv. 200851051 (Oct. 27, 2008)

 

 

 I.R.S. Chief Couns. Adv. 200637032 (Sept. 2, 2005)

 

 

 IRS Publication 544, Sales and Other Dispositions of Assets

 

 

 MSSP Training Guide, Partnership, Chapter 7 -- Dispositions of

 

 Partnership Interest (Rev. 3-2008)

 

 

 Merriam-Webster, http://www.merriam-webster.com/dictionary/derivative

 

STATEMENT OF JURISDICTION

 

 

This is an appeal from a final judgment of the United States Tax Court.2 The Tax Court had jurisdiction pursuant to Sections3 6213(a) and (f)(1) because Pilgrim's Pride timely filed a petition in the Tax Court on May 26, 2010, for a redetermination of the deficiency in income tax set forth by the Commissioner of Internal Revenue (hereinafter the "IRS") in his Notice of Deficiency dated December 21, 2009 (the "Notice of Deficiency") within 150 days of the automatic stay under 11 U.S.C. § 362(a)(8) being lifted on December 28, 2009 in Pilgrim's Pride's bankruptcy case.4 This Court has jurisdiction pursuant to Sections 7482(a)(1) and (b)(1)(B) because Pilgrim's Pride's principal place of business was in Pittsburg, Texas when it filed its petition seeking redetermination of tax liability with the Tax Court on May 26, 2010.5 This appeal is timely, as the decision of the Tax Court was entered on March 10, 2014, and the Notice of Appeal was duly filed with the Tax Court on April 14, 2014.6

 

STATEMENT OF THE ISSUE

 

 

Whether Pilgrim's Pride's loss on the abandonment of the Securities (as defined below), which had substantial value, is an ordinary loss under the general rule set forth in Section 165(a) or, through the application of the limited look-through rule in Section 1234A(1) for contractual and other derivative rights and obligations with respect to capital assets, is a capital loss that is subject to the limitation referenced in Section 165(f).

 

STATEMENT OF THE CASE

 

 

A. Course of Proceedings and Disposition in the Court Below

On May 26, 2010, Pilgrim's Pride timely filed a petition in the Tax Court for a redetermination of the deficiency in income tax set forth by the IRS in the Notice of Deficiency.7 The facts of the case were fully stipulated and the case was submitted for determination without trial pursuant to Tax Court Rule 122.8

The parties submitted opening and reply briefs during June and August of 2011, respectively.9 On May 21, 2012, the case was reassigned from Judge Halpern to Judge Gustafson.10 On June 29, 2012, Judge Gustafson requested supplemental briefing, which the parties submitted during July 2012.11 In all three briefs, Pilgrim's Pride argued that its loss was an ordinary loss pursuant to the general rule set forth in Section 165(a).12 The IRS, on the other hand, made only one argument in all three of its briefs; that Pilgrim's Pride's abandonment of the Securities caused the Securities to become worthless, that Section 165(g) therefore applied, and, as a result, Pilgrim's Pride's abandonment loss was a capital loss.13

On April 23, 2013, the case was reassigned to a third Tax Court Judge, Judge Dawson.14 On May 20, 2013, Judge Dawson issued an order (the "Sua Sponte Order") explaining for the first time that it appeared to the Tax Court that Section 1234A applied, such that Pilgrim's Pride's loss should be treated as a loss from the sale of a capital asset.15 The Tax Court ordered the parties to file supplemental briefs addressing the applicability of Section 1234A to Pilgrim's Pride's abandonment loss.16 The parties each submitted second supplemental reply briefs in response to the Sua Sponte Order during July 2013.17 For the first time in this case, the IRS shifted its position and argued that Section 1234A applied to Pilgrim's Pride's abandonment loss and deemed the loss as being from the sale of a capital asset, and thus subject to the limitation set forth in Section 165(f).18 The IRS took this position notwithstanding the position taken in its initial reply brief, which was that the parties:

 

[A]gree that the general rule set forth in I.R.C. § 165(a) provides for a deduction for losses incurred through the abandonment of property; that there are several limitations to this general rule; and that many of these limitations do not apply, including the limitation relating to sales or exchanges in I.R.C. § 165(f), since no actual sale or exchange occurred in this instance. The only dispute in this case is whether the limitation in I.R.C. § 165(g) applies in this case.[ 19 ]

 

On December 11, 2013, the Tax Court issued its Opinion in the case, which may be found at 141 T.C. No. 17 (hereinafter, the "Opinion").20 As explained in the Opinion, the only issue remaining for decision was whether Pilgrim's Pride's abandonment loss was ordinary or capital.21 The Tax Court, however, incorrectly concluded that:

 

Petitioner is not entitled to a deduction for an abandonment loss pursuant to section 1.165-2(a), Income Tax Regs., on the surrender of the Securities, because the losses are treated as losses from a sale or exchange pursuant to section 1234A. See sec. 1.165-2(b), Income Tax Regs. However, pursuant to section 165(f), petitioner is entitled to a capital loss on the surrender of the Securities, as allowed by respondent.[ 22 ]

 

Due to this substantial error in law, Pilgrim's Pride moved, on January 10, 2014, for the Tax Court to reconsider and revise its Opinion.23 Judge Dawson ordered and the IRS submitted a response to Pilgrim's Pride's motion for reconsideration.24 The Tax Court denied Pilgrim's Pride's motion for reconsideration on March 6, 2014.25 On March 10, 2014, the Tax Court entered its decision that Pilgrim's Pride is liable for a deficiency of $29,682,682 in its Federal income tax for the tax year ending June 30, 2004.26

Pilgrim's Pride hereby appeals the Tax Court's determination that, pursuant to Section 1234A, its abandonment loss is deemed to be a capital loss, which is subject to the limitation referenced in Section 165(f). For the reasons set forth herein, Pilgrim's Pride respectfully submits that Section 1234A has absolutely no application to its abandonment loss. As a result, the limitation referenced in Section 165(f) does not apply, and Pilgrim's Pride's loss is an ordinary loss under the general rule for losses set forth in Section 165(a).

B. Statement of Facts

Pilgrim's Pride is a corporation organized under the laws of the State of Delaware.27 Pilgrim's Pride is the successor in interest to Pilgrim's Pride Corporation of Georgia f/k/a Gold Kist, Inc., a Delaware corporation, as successor in interest to Gold Kist Inc., a Georgia cooperative marketing association ("GK Co-op").28 On October 5, 1999, pursuant to a contractual obligation with Southern States Cooperative, Incorporated ("Southern States"), GK Co-op purchased certain securities from Southern States and Southern States Capital Trust I for an aggregate total of $98.6 million in cash (the "Securities").29

In early 2004, Southern States approached GK Co-op to settle the Securities, and GK Co-op offered the Securities to Southern States for $31.5 million.30 Southern States rejected GK Co-op's offer and instead proposed to settle the Securities for $20 million.31 At a meeting held on May 24, 2004, GK Co-op's Board of Directors decided to reject Southern States' offer.32 Instead, the Board voted to abandon the Securities for no consideration.33 On June 24, 2004, GK Co-op irrevocably abandoned the Securities for no consideration or relief of liability on a non-negotiated basis.34 Based on Southern States' offer, and as the parties have stipulated, the Securities were worth at least $20 million immediately prior to GK Co-op abandoning them.35

On its 2004 Tax Return, GK Co-op reported an ordinary loss deduction under Section 165(a) of $98.6 million, which amount was equal to its adjusted tax basis in the Securities.36 The Commissioner issued to Pilgrim's Pride, as successor in interest to GK Co-op, the Notice of Deficiency, which asserts that GK Co-op's loss on the abandonment of the Securities was a capital loss.37

 

SUMMARY OF THE ARGUMENT

 

 

Pilgrim's Pride's loss on the abandonment of the Securities is an ordinary loss under Section 165(a). The limitations set forth in Sections 165(c)-(m) do not apply.

The IRS initially argued that the limitation in Section 165(g) for worthless securities applied. The parties have stipulated that the Securities were worth at least $20 million immediately prior to abandonment.38 Therefore, the Securities were not, and did not become, "worthless" when they were abandoned, and the Tax Court appropriately held that Section 165(g) does not apply.39

On its own initiative, the Tax Court raised and held that the limitation set forth in Section 165(f) for actual or deemed sales or exchanges applies to the abandonment through the application of Section 1234A(1).40

The plain text of Section 1234A, when read as a whole, as supported by the legislative history, makes it clear that Section 1234A(1) has absolutely no bearing on Pilgrim's Pride's loss on the abandonment of the Securities. The Tax Court's strained interpretation is not supported by the statute, the legislative history, or Treasury's and the IRS's own interpretations of these provisions, and thus should be reversed.

 

ARGUMENT AND AUTHORITIES

 

 

A. Standard of Review

Decisions of the Tax Court regarding issues of law are reviewed de novo by this Court.41 The facts of this case were fully stipulated and the case was submitted for determination without trial pursuant to Tax Court Rule 122.42 Accordingly, this case presents purely legal issues that are subject to de novo review by this Court.

B. Pilgrim's Pride's Loss on the Abandonment of the Securities is an Ordinary Loss under the General Rule Set Forth in Section 165(a)

The general rule providing for an ordinary deduction for losses is set forth in Section 165(a).43 Specifically, under the heading "General rule", Section 165(a) provides that "[t]here shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise." Pursuant to Section 165(b), the amount of the deduction is equal to the adjusted basis for the property as provided in Section 1011. Thus, if a taxpayer incurs a loss, these sections allow the taxpayer to take an ordinary loss deduction in an amount equal to the taxpayer's adjusted basis in the property with respect to which the loss was sustained.

The general rule in Section 165(a) applies unless a specific exception or limitation set forth (or cross referenced) in Sections 165(c) - 165(m) applies. In this case, none of the limitations or exceptions in Sections 165(c) - 165(m) apply.

In its first three briefs filed in Tax Court, the IRS took the position that Pilgrim's Pride's loss was a capital loss through the application of Section 165(g).44 For the reasons set forth in Pilgrim's Pride's opening45 and reply46 briefs filed in Tax Court, Section 165(g) does not apply because it only applies to losses that result from securities that are capital assets becoming "worthless" during the taxable year. Although neither the Code nor applicable Treasury Regulations define the term "worthless" for purposes of Section 165(g), the Supreme Court has stated that whether corporate stock becomes worthless during a taxable year "is purely a question of fact to be determined in the first instance by the Tax Court. . . ."47 In this case, the parties have stipulated that the Securities were worth at least $20 million immediately prior to GK Co-op abandoning them (i.e., the Securities were not worthless).48 Further, as explained by the Tax Court, "if the taxpayer abandons a security that has value, Section 165(g) does not apply regardless of whether the security later becomes worthless."49 Accordingly, the Securities were not, and did not become, "worthless" during Pilgrim's Pride's 2004 Tax Year, and thus Section 165(g) does not apply to the abandonment of the Securities. Moreover, if this Court determines that Section 1234A(1) also does not apply, there is no reason to send the case back to the Tax Court for a determination as to whether Section 165(g) applies because the Tax Court has already held that Section 165(g) does not apply.50

The only open question and the subject of this appeal is whether Section 1234A(1) applies to Pilgrim's Pride's abandonment loss and deems the loss to be a loss from the sale of a capital asset, which is subject to the limitation referenced in Section 165(f). In making such determination, it should be noted that Section 165(f) does not, on its own terms, apply to Pilgrim's Pride's abandonment loss. Section 165(f) only applies to "[l]osses from sales or exchanges of capital assets." This Court,51 the Tax Court,52 and the IRS53 have all held or 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. GK Co-op abandoned the Securities for no consideration or relief of liability.54 As a result, there was no "sale or exchange" of the Securities and, therefore, Section 165(f) cannot and does not, on its own terms, apply.55

Section 1234A(1), however, deems certain gains or losses to be "treated as a gain or loss from the sale of a capital asset." For the reasons discussed below, Section 1234A(1) has absolutely no application to Pilgrim's Pride's abandonment loss. Therefore, the limitation referenced in Section 165(f) does not apply by reason of Section 1234A(1). As a result, the only provision that can apply here is the general rule of Section 165(a), which provides that Pilgrim's Pride's abandonment loss is an ordinary loss.

C. Section 1234A(1) Does Not Apply to Pilgrim's Pride's Loss on the Abandonment of the Securities

Section 1234A was added to the Code as part of the Economic Recovery Tax Act of 1981 (the "1981 Act").56 Since that time, Section 1234A has been amended five times, and currently reads, as it did in 2004, as follows:

§ 1234A. Gains or losses from certain terminations.

Gain or loss attributable to the cancellation, lapse, expiration, or other termination of --

(1) a right or obligation (other than a securities futures contract, as defined in section 1234B) with respect to property which is (or on acquisition would be) a capital asset in the hands of the taxpayer, or

(2) 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,

 

shall be treated as gain or loss from the sale of a capital asset. The preceding sentence shall not apply to the retirement of any debt instrument (whether or not through a trust or other participation arrangement).

 

Prior to the Tax Court's Opinion, Pilgrim's Pride is not aware of any cases, rulings, or regulations that have held that (or even addressed or considered whether) the loss incurred upon the abandonment of a capital asset (tangible or intangible) is subject to Section 1234A(1). Therefore, this is a case of first impression. As discussed below, the plain terms of the statute, as supported by the legislative history, make it clear that Section 1234A(1) simply does not apply to the abandonment of the Securities. Therefore, the Tax Court's holding otherwise is clearly erroneous, and should be reversed.

 

1. By its plain terms, Section 1234A(1) does not apply to the abandonment of the Securities

 

A basic tenant of statutory construction is that one must begin with the plain language of the statute when determining its meaning and application to a particular set of facts.57 When the language of the statute is clear on its face, it must be enforced according to its terms because "courts must presume that a legislature says in a statute what it means and means in a statute what it says there."58 The words used in a statute are to be construed in accordance with their ordinary, everyday meaning unless Congress makes clear in the statute that the words should have a different, unique meaning.59

The plain language of Section 1234A(1), in relevant part, limits its scope to the "cancellation, lapse, expiration, or other termination of . . . a right or obligation . . . with respect to property which is (or an acquisition would be) a capital asset in the hands of the taxpayer." The object of this sentence is "right or obligation." What follows is a description that further limits the type of right or obligation that may be subject to this rule. The right or obligation terminated must be "with respect to property" and further, such "property" must be (or on acquisition become) a "capital asset." In essence, Section 1234A(1) is a look-through rule that requires one to look through the right or obligation (i.e., the contract) to determine whether the underlying property that is the subject of the contract is (or would be on acquisition) a capital asset.

Congress thus drafted Section 1234A(1) narrowly to apply only to rights or obligations that derive their value from underlying property, which is (or would be on acquisition) a capital asset.60 The common everyday meaning of the phraseology used by Congress in Section 1234A(1) -- right with respect to property -- is that of a derivative,61 and not of direct ownership of property. In this case, no contractual or other derivative rights or obligations with respect to the Securities are at issue. Rather, GK Co-op actually owned the Securities themselves prior to the abandonment, and the Securities were the capital asset.62 Therefore, Section 1234A(1) does not, on its face, apply to GK Co-op's abandonment of the Securities.

If, for sake of argument, one presumes that the Tax Court is correct that the Securities are "rights that the owner has in the management, profits, and assets of a corporation,"63 the underlying property is not, nor would be on acquisition, a capital asset.64 Thus, Section 1234A(1) does not apply to the abandonment of the Securities.65

 

2. When the statute is read as a whole, it is likewise clear that Section 1234A(1) does not apply to the abandonment of the Securities

 

It is a fundamental rule of statutory construction that "[a] statute is to be construed so that each of its provisions is given full effect and not to render parts of the statute inoperative or superfluous."66 "Interpretation of a word or phrase depends upon reading the whole statutory text, considering the purpose and context of the statute, and consulting any precedents or authorities that inform the analysis."67 "To take a few words from their context and with them thus isolated to attempt to determine their meaning, certainly would not contribute greatly to the discovery of the purpose of the draftsmen of a statute."68 Furthermore, it is a "well established principle of statutory construction that where Congress includes particular language in one section of a statute but omits it in another section of the same Act, it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion or exclusion."69

To interpret Section 1234A, the entire statute must be read as a whole. Paragraph (1) applies to "a right or obligation . . . with respect to property which is . . . a capital asset" whereas paragraph (2) applies to "a section 1256 contract . . . which is a capital asset."70 A Section 1256 contract is, in and of itself, property.71

Thus, Section 1234A(1) applies to the cancellation, termination, lapse, etc. of a "right or obligation" with respect to property that is a capital asset, whereas Section 1234A(2) applies to the cancellation, termination, lapse, etc. of a specific type of property (i.e., a Section 1256 contract) that is a capital asset.

By including the phrase "right or obligation" in paragraph (1) and not in paragraph (2), Congress clearly intended that the two paragraphs have different scopes and applications. Stated differently, the rules of statutory construction dictate that the phrase "right or obligation . . . with respect to property" in paragraph (1) must have independent significance and operative effect, and should not overlap with or subsume that which is covered by paragraph (2) (i.e., the direct ownership of specific property, a Section 1256 contract).72 If paragraph (1) encompasses the termination of property rights inherent in intangible property that is a capital asset as determined by the Tax Court,73 then paragraph (2) becomes inoperative and superfluous.

Under the Tax Court's interpretation of Section 1234A(1), the termination of a Section 1256 contract that is a capital asset would terminate the property rights inherent in the ownership of that intangible property. As such, the termination would be covered by paragraph (1) of Section 1234A in all cases and there would be absolutely no need for paragraph (2) of Section 1234A.

Congress, however, thought differently. Congress added Section 1234A(2) to the Code in 1983 and thus clearly did not believe that Section 1234A(1) covered the factual situation addressed by Section 1234A(2).74 Indeed, Section 1234A(2) states that it applies to "a section 1256 contract . . . not described in paragraph (1)." Thus, Section 1234A must be interpreted in a manner such that paragraph (1) does not apply to all Section 1256 contracts, and paragraph (2) applies to Section 1256 contracts not covered by paragraph (1). The only way to achieve this result is to conclude that Section 1234A(1) requires one to look through the right or obligation to see if the underlying subject is (or would on acquisition be) a capital asset.

Section 1234A(2), on the other hand, applies where the Section 1256 contract itself is a capital asset, but the property underlying it is not (nor would on acquisition be) a capital asset.75 Stated differently, Section 1234A(2) is the only provision of Section 1234A that applies to the termination of direct ownership of a contract, which, like the Securities, is a capital asset but the underlying subject of the contract is not a capital asset. Section 1234A(2), however, is limited to Section 1256 contracts and thus does not apply to GK Co-op's abandonment of the Securities.

In 2000, Congress again amended Section 1234A to add a new paragraph (3), which read as follows: "(3) a securities futures contract (as so defined) which is a capital asset in the hands of the taxpayer."76 This amendment came three years after Section 1234A(1) was amended in 1997 to apply to all property rather than just personal property as defined in Section 1092(d)(1). As explained in the Opinion, the Tax Court felt that the 1997 amendment to Section 1234A "extended the application of section 1234A to terminations of all rights and obligations with respect to property that is a capital asset in the hands of the taxpayer . . . including not only derivative contract rights but also property rights arising from the ownership of property."77 Yet, three years later, Congress added paragraph (3), which covers the termination, lapse, expiration, etc. of securities future contracts that are capital assets. If the Tax Court's interpretation of Section 1234A(1) were correct (which it is not), then there would have been absolutely no reason for Congress to add paragraph (3) in 2000 because Section 1234A(1) would have already covered "all rights and obligations with respect to property that is a capital asset."

Quite simply put, the Tax Court's interpretation of the scope of Section 1234A(1) is wrong and it cannot be reconciled with either Section 1234A(2), as it currently exists, or with Congress' addition of Section 1234A(3) in 2000. Rather, the only logical way to reconcile Section 1234A(1) with Section 1234A(2) and the former Section 1234A(3), is to conclude that Section 1234A(1) applies to rights or obligations and requires a look through to see if the rights or obligations relate to property that is (or would be upon acquisition) a capital asset. Whereas Sections 1234A(2) and (3) apply to direct ownership in specific types of capital assets (e.g., Section 1256 contracts and securities futures contracts) where the underlying property is not, nor would be upon acquisition, a capital asset. As a result, Section 1234A(1) has absolutely no application to Pilgrim's Pride's abandonment loss because the property underlying the Securities is not, nor would be on acquisition, a capital asset.

Finally, it should be noted that in 2000 Congress added the parenthetical "(other than a securities future contract, as defined in section 1234B)" immediately after the phrase "right or obligation" in Section 1234A(1).78 Thus, in 2000, Congress expressly carved out securities future contracts from the phrase "right or obligation" in Section 1234A(1). This is yet further evidence and proof that Section 1234A(1) provides a look-through rule and the phrase "right or obligation" is limited to contractual interests and it does not apply to direct ownership of stock.

 

3. The legislative history to Section 1234A also demonstrates that Congress intended for Section 1234A(1) to be limited in scope

 

Section 1234A was enacted in 1981 as part of the "Tax Straddles" portion of the Economic Recovery Tax Act of 1981.79 As enacted, Section 1234A provided:

 

Gain or loss attributable to the cancellation, lapse, expiration, or other termination of a right or obligation with respect to personal property (as defined in section 1092(d)(1)) which is (or on acquisition would be) a capital asset in the hands of the taxpayer shall be treated as gain or loss from the sale of a capital asset.[ 80 ]

 

It is important to understand the scope of Section 1234A as originally enacted because the operative language that is the subject of this case -- cancellation, lapse, expiration, or other termination of a right or obligation with respect to property -- has not changed since 1981.

The first straddle-related legislative proposal that addressed the sale or exchange requirement for capital gain or loss was made in March 1981 by Sen. Daniel P. Moynihan. Sen. Moynihan proposed to add the following new definition to Section 7701(a) (the "Moynihan Bill"): "The term "sale or exchange" when used with reference to any capital asset means any disposition of such asset."81

The Joint Committee on Taxation print that provided background for the Senate subcommittee hearings on the Moynihan Bill provided the following explanation of the provision:

 

The definition of capital gains and losses in Section 1222 requires that there be a "sale or exchange" of a capital asset. Court decisions have interpreted this requirement to mean that when a disposition is not a sale or exchange, for example, a lapse, cancellation, or abandonment, the disposition produces ordinary income or loss. This interpretation has been applied even to dispositions which are economically equivalent to a sale or exchange. If a taxpayer can choose the manner of disposing of a capital asset, he may sell or exchange it, if it has appreciated in value, to realize capital gains, but he may choose to dispose of it in some fashion other than a sale or exchange, if its value has decreased in order to realize a fully deductible ordinary loss.[ 82 ]

 

The Treasury Department endorsed the approach taken in the Moynihan Bill.83

The Moynihan Bill received minimal attention in the subcommittee hearings. Nonetheless, when the 1981 Act was later reported by the Senate Finance Committee, the Moynihan Bill, with its sweeping language, was dropped in favor of the narrowly crafted language that would ultimately be incorporated into the 1981 Act as Section 1234A:

 

Gain or loss attributable to the cancellation, lapse, expiration, or other termination of a right or obligation with respect to personal property (as defined in section 1092(d)(1)) which is (or on acquisition would be) a capital asset in the hands of the taxpayer shall be treated as gain or loss from the sale of a capital asset.84

 

The Congressional Record does not explain why the Moynihan Bill was replaced with the language that ultimately became Section 1234A. However, the clear implication of the replacement is that Congress determined that it did not want to treat any disposition of a capital asset, including an abandonment, as a sale or exchange. Rather, it elected to address a much more narrow situation involving the "the cancellation, lapse, expiration, or other termination of a right or obligation with respect to personal property . . . which is (or on acquisition would be) a capital asset."

In sum, in 1981 Congress was presented with broad language that would have treated any disposition of a capital asset as a sale or exchange (i.e., the Moynihan Bill). Congress, however, rejected this broad provision in favor of the much more narrow language of the predecessor of Section 1234A(1), which was limited to terminations, etc. of rights or obligations with respect to publicly traded personal property which is, or would be upon acquisition, a capital asset.

In describing the reason for the enactment of Section 1234A, the Senate Committee on Finance explained that some taxpayers and tax shelter promoters had been attempting to exploit court decisions holding that ordinary income or loss results from "certain dispositions" of capital assets.85 The Senate Committee on Finance further explained that "[s]ome of the more common of these tax-oriented ordinary loss and capital gain transactions involve cancellations of forward contracts for currency or securities."86 The Senate Committee on Finance then provided the following example to illustrate the type of transaction Section 1234A was intended to address:

 

[A] taxpayer may simultaneously enter into a contract to buy German marks for future delivery and a contract to sell German marks for future delivery with very little risk. If the price of German marks thereafter declines, the taxpayer will assign his contract to sell marks to a bank or other institution for a gain . . . and cancel his obligation to buy marks by payment of an amount in settlement of his obligation to the other party to the contract. The taxpayer will treat the sale proceeds as capital gain and will treat the amount paid to terminate his obligation to buy as an ordinary loss.[ 87 ]

 

Thus, while broadly describing the sale or exchange requirement in the legislative history as a recurring issue, Congress forwent the broad language in the Moynihan Bill in favor of the much more narrowly tailored language of Section 1234A that focuses on situations where taxpayers were entering into contracts regarding capital assets.

In 1983, Congress amended Section 1234A to apply to "a regulated futures contract (as defined in section 1256)" as a technical correction, effective as if included in the original enactment in 1981.88 As amended, Section 1234A read as follows:

 

Gain or loss attributable to the cancellation, lapse, expiration, or other termination of --

 

(1) a right or obligation with respect to personal property (as defined in section 1092(d)(1)) which is (or on acquisition would be) a capital asset in the hands of the taxpayer, or

(2) a regulated futures contract (as defined in section 1256) not described in paragraph (1) 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.[ 89 ]

 

This amendment was made in connection with an amendment to Section 1256, which eliminated the requirement that a contract must require the delivery of personal property (as defined in Section 1092(d)(1)) to be considered a regulated futures contract.90 In describing the current state of the law that led to the amendment, the House Committee on Ways and Means explained that since the enactment of the 1981 Act, the Commodity Futures Trading Commission authorized trading in several futures contracts that call for cash settlement only and do not require the delivery of personal property.91 Thus, Section 1256 was amended to cover these cash settled contracts, and a corresponding change was made to Section 1234A because, while a regulated futures contract may itself constitute a capital asset, Section 1234A as originally enacted would not apply to its termination if the regulated futures contract only called for cash settlement. This is because the property underlying the contract would not be publicly traded personal property which is (or on acquisition would be) a capital asset. Thus, as discussed above, Section 1234A(2) was added, and it addresses, the narrow situation when a contract is a capital asset (i.e., a regulated futures contract) but the underlying property is not.

In 1984, Congress amended Section 1234A(2) by deleting the phrase "a regulated futures contract" and inserting the phrase "a section 1256 contract."92 This change was made because Section 1256 was also amended to apply to additional financial contracts.93 Congress also amended Section 1234A to provide, effective as if included in the 1981 Act, that Section 1234A would "not apply to the retirement of any debt instrument (whether or not through a trust or other participation arrangement)."94 The Conference Report explains that "the provision of present law prescribing capital gain or loss treatment with respect to certain contract terminations" is amended "to exclude from its application . . . the retirement of any debt instrument (whether or not through a trust or other participation arrangement, such as a mortgage pass-through certificate)."95 The Joint Committee on Taxation explained that:

 

Section 1234A was enacted in 1981 to prevent certain straddles abuses, and was not intended to change the long-standing tax treatment of market discount on residential mortgage investments and other obligations of natural persons as ordinary income. See section 1271(b). The amendment (sec. 102(e)(9) of the Act) merely clarifies that the same result is obtained when the holder's interest is an indirect one, such as a security in a fixed investment trust investing in residential mortgage.[ 96 ]

 

Accordingly, the purpose of this amendment was to clarify that Section 1271 (which applies to the retirement of any debt instrument), and not Section 1234A, governs the treatment of indirectly held debt instruments.97

Section 1234A(1), as originally enacted and amended by Congress in the early 1980s, was thus clearly intended to be limited in scope to terminations, etc. of contracts where the underlying property is (or would on acquisition be) a capital asset in the hands of the taxpayer. From 1981 to 1997, the type of property that was subject to a Section 1234A(1) contract was personal property as defined in Section 1092(d)(1) (i.e., publicly traded personal property). In 1997, Congress amended Section 1234A(1) by simply replacing the phrase "personal property (as defined in section 1092(d)(1))" with the term "property" so as to cover contractual and other derivative rights with respect to all types of property, not just publicly traded personal property.98 Importantly, however, Congress did not change the operative "right or obligation with respect to" language that, since 1981, has applied a look through rule and limited the scope of Section 1234A(1) to terminations, etc. of contracts where the underlying property is (or on acquisition would be) a capital asset.

The legislative history to the 1997 amendment to Section 1234A is consistent with that of the 1981 Act. The House Committee on the Budget restated some of the same issues addressed in the legislative history to the 1981 Act, broadly described the sale or exchange requirement, and then went on to focus specifically on the termination of contractual interests or the modification of property rights under contracts where the asset underlying the contract is a capital asset.99

The types of situations Congress intended to address through the 1997 amendment to Section 1234A(1) were detailed in the "Explanation of Provision" section of the legislative history.100 Three cases, in particular, were referenced in this section as illustrating the types of property interests that would be affected by the 1997 amendment to Section 1234A(1).101 Two of the cases address the tax treatment of amounts received to release a lessee from an obligation to restore the leased premises.102 The third case addresses the termination of a taxpayer's contractual right to acquire stock.103 Consequently, one does not have to speculate regarding Congress's intent with respect to stock, because Congress specifically gave an example involving stock. The stock example used by Congress solely involved a contract to purchase stock, and not the direct ownership of the stock itself.104 Had Congress intended to cover the termination of direct ownership of stock, one has to presume Congress would have provided an example of a termination of direct ownership of stock. Congress instead chose to provide an example of a termination of a contractual right to purchase stock.

Congress's intent regarding the effect and scope of the 1997 amendment to Section 1234A(1) is clearly illustrated by its reference to the lease and stock-purchase contract cases in the "Explanation of Provision" section. These references demonstrate that Congress was seeking to expand the types of property that may underlie the contracts being terminated or modified, but did not intend for this amendment to expand the scope of Section 1234A(1) to eliminate the look-through rule.105

Furthermore, under the heading "Reasons for Change," both the House Committee on the Budget and the Senate Committee on Finance state that the "Committee believes that some transactions, such as settlements of contracts to deliver a capital asset, are economically equivalent to a sale or exchange of such contracts. . . ."106 The House Committee on the Budget goes on to explain that "[c]ourts have given different answers as to whether transactions which terminate contractual interests are treated as a "sale or exchange'" and notes that this has caused uncertainty for both taxpayers and the IRS.107 Congress's focus on derivatives (e.g., contracts that derive their value from an underlying asset) thus continued to persist in the legislative history to the 1997 amendment to Section 1234A(1).

The Tax Court misinterpreted the 1997 amendment to Section 1234A by concluding that it expanded the scope of Section 1234A(1) "to terminations of all rights and obligations with respect to property that is a capital asset in the hands of the taxpayer . . . including not only derivative contract rights but also property rights arising from the ownership of property."108 It is unimaginable how the Tax Court reached this conclusion given that Congress did not, and has not since 1981, changed the operative language of Section 1234A(1), which continues to apply a look through rule that looks through rights or obligations to determine if the underlying property is, or would on acquisition be, a capital asset.

If the Tax Court's interpretation is correct, in 1997 Congress necessarily must have chosen to expand the scope of Section 1234A to be as broad as (or nearly as broad as) the Moynihan Bill. There is, however, absolutely no indication in the legislative history that Congress intended this result. In addition, Congress retained the operative language of Section 1234A(1). Had Congress intended for Section 1234A(1) to be as broad as the Moynihan Bill, presumably Congress would have used clear and unambiguous language like that in the Moynihan Bill. This, however, did not happen. As such, the clear implication, coupled with the legislative history and the retention of the operative language of Section 1234A(1) (i.e., "right or obligation with respect to property") supports Pilgrim's Pride's interpretation that Section 1234A(1) continues to have a narrow application and does not, as the Tax Court incorrectly concluded, apply to property rights inherent in intangible property (i.e., direct ownership of intangible property).

D. Treasury's and the IRS's Position, Prior to Responding to the Sua Sponte Order, Has Consistently Been That Section 1234A(1) Does Not Apply to the Abandonment of Intangible Property

Prior to responding to the Sua Sponte Order issued by the Tax Court on May 20, 2013, Treasury and the IRS have consistently taken the position that Section 1234A(1) does not apply to the abandonment of intangible property. Thus, Treasury and the IRS -- the agencies responsible for administering the Code -- clearly did not believe that Section 1234A(1), after amendment in 1997, applied to the termination of a direct ownership interest in intangible property that is a capital asset.109

 

1. Treas. Reg. § 1.165-5(i)

 

Ten years after Section 1234A(1) was amended in 1997, Treasury and the IRS proposed in September 2007, and finalized in March 2008, a prospective Treasury Regulation under Section 165(g) -- Treas. Reg. § 1.165-5(i) -- that deems an abandoned security to be worthless, and therefore, subject to the rules under Section 165(g) for worthless securities.110 Section 165(g)(1), in turn, deems a worthless security as being sold or exchange on the last day of the relevant tax year. Treas. Reg. § 1.165-5(i)(1) provides, in relevant part, that if an abandoned security (other than certain securities of affiliated corporations) is a capital asset, "the resulting loss is treated as a loss from the sale or exchange, on the last day of the taxable year, of a capital asset. See section 165(g)(1) and paragraph (c) of this section."

If the Tax Court's determination that Section 1234A "applies broadly to derivative contractual rights and obligations as well as inherent property rights"111 was correct (which it is not), there would have been absolutely no reason for Treasury and the IRS to have issued Treas. Reg. § 1.165-5(i) in 2008. Moreover, one would have expected for Treasury and the IRS to at least mention Section 1234A in the preamble to the proposed or final versions of the regulation had they thought it to be even remotely applicable. Yet, they did not mention Section 1234A even once.112 Instead, they promulgated a prospective regulation under Section 165(g) that constructs a different fiction than that adopted by the Tax Court in its strained reading of Section 1234A, by providing that abandoned securities are deemed to be worthless and thus subject to the deemed sale or exchange rule in Section 165(g)(1).

In the preamble to the proposed version of the regulations, Treasury and the IRS stated that the reason for Treas. Reg. § 1.165-5(i) was that the agencies were aware of taxpayers taking the position that losses from abandoned securities that are capital assets were ordinary losses under Section 165(a) and not subject to Section 165(g).113 As such, the regulation, while prospective only and not applicable here, was promulgated to directly address the abandonment of securities. The clear implication is that Treasury and the IRS did not interpret Section 1234A(1) as deeming there to be a sale or exchange upon the termination of direct ownership in securities as determined by the Tax Court.

If Section 1234A(1) applied to the abandonment of a security, which it does not, Treas. Reg. § 1.165-5(i) would be in direct conflict with Section 1234A(1). While both provisions deem sale or exchange treatment, the gain or loss under Section 1234A(1) is solely capital gain or loss, whereas the gain or loss under Section 165(g) can be capital or ordinary depending on whether the requirements of Section 165(g)(3) are satisfied.114 Thus, if Section 1234A(1) applied to the abandonment of securities, Treasury and the IRS would have, through the promulgation of Treas. Reg. § 1.165-5(i), created an exception to Section 1234A(1)'s capital gain treatment where there is absolutely no indication that Congress intended there to be such an exception. The promulgation of such a regulation would be invalid.115 In short, there is absolutely no way to reconcile Section 1234A(1) with Section 165(g)(3) and Treas. Reg. § 1.165-5(i) because the provisions can treat the exact same transaction differently.

Treas. Reg. § 1.165-5(i) is prospective only and does not apply to Pilgrim's Pride's loss from the abandonment of the Securities.116 Nevertheless, the very existence of Treas. Reg. § 1.165-5(i) illustrates that Treasury and the IRS did not interpret Section 1234A(1) as applying to the abandonment of an intangible capital asset such as the Securities.

The Tax Court, in the Opinion, attempts to triage the obvious conflict between Treas. Reg. § 1.165-5(i) and its interpretation of Section 1234A(1) by stating that "section 1.165-5(i) . . . gives effect to, and is consistent with, section 1234A, as well as section 165(g)(3)."117 The Tax Court states that under Section 165(g)(3), "a security in a domestic corporation that is affiliated with the taxpayer is not treated as a capital asset" and that it is Section 165(g)(3), rather than Treas. Reg. § 1.165-5(i), that creates an exception to Section 1234A for affiliated corporations.118 This is simply not correct. As an initial matter, Section 165(g)(3) cannot be viewed as creating an exception to Section 1234A(1) for affiliated corporations because Section 165(g)(3) only applies for purposes of Section 165(g)(1), and Section 165(g)(1) only applies when securities become worthless. Section 1234A(1), in contrast, applies to any cancellation, lapse, expiration, or other termination. Section 165(g)(3) simply does not prevent securities in affiliated corporations from being treated as capital assets for purposes of applying other Code provisions. Moreover, the Tax Court's insistence that Section 165(g)(3) is an exception to its interpretation of Section 1234A requires the illogical conclusion that this "exception" in Section 165(g)(3) was created decades before the general rule of Section 1234A(1).119

 

2. Revenue Ruling 93-80

 

The continued validity of Revenue Ruling 93-80120 also illustrates that the IRS does not interpret Section 1234A(1) as applying to the abandonment of intangible property that is a capital asset. Revenue Ruling 93-80 holds that a taxpayer is allowed an ordinary loss under Section 165(a) upon the abandonment of a partnership interest provided there is no actual or deemed distribution in connection with the abandonment. In reaching this conclusion, Revenue Ruling 93-80 explains that:

 

Section 165(f) of the Code provides that losses from sales or exchanges of capital assets are allowed only to the extent allowed in sections 1211 or 1212. Under section 1.165-2 of the regulations, however, absent a sale or exchange a loss that results from the abandonment or worthlessness of nondepreciable property is an ordinary loss even if the abandoned or worthless asset is a capital asset (such as a partnership interest).[ 121 ]

 

While Revenue Ruling 93-80 was issued before the 1997 amendment to Section 1234A(1) that the Tax Court finds to be significant,122 this Revenue Ruling has not been revoked and it continues to represent the position of the IRS today. The Tax Court attempts to address this by stating that the IRS is not required to take a position as soon as a statute authorizes.123 While this may be true, it is quite significant that the IRS has continued to maintain the same position that, if the Tax Court is correct (which it is not), has been contrary to the statute for more than 17 years. The clear implication is that the IRS, until now in this case, has never interpreted the 1997 amendment to Section 1234A(1) to have any application to, or impact on, the conclusion of Revenue Ruling 93-80 (i.e., the abandonment of intangible property (a partnership interest) produces ordinary loss when there is no deemed consideration).

Moreover, the IRS continued to cite Revenue Ruling 93-80 after 1997 for the proposition that loss on the abandonment of a partnership interest is ordinary if sale or exchange treatment does not apply.124 If the Tax Court were correct in its interpretation of Section 1234A(1), which it is not, any loss on the abandonment of a partnership interest, which is a capital asset, would never be ordinary, making the holding in Revenue Ruling 93-80 regarding ordinary treatment of a loss on the abandonment of a partnership interest flat wrong.

In addition, it is notable that Section 1234A(1) is never mentioned in Revenue Ruling 93-80, despite the fact that publicly traded partnership interests could have been considered to be personal property within the meaning of Section 1092(d)(1). Thus, if one were to accept the Tax Court's interpretation of Section 1234A(1), the abandonment of a partnership interest could have been subject to Section 1234A(1) when Revenue Ruling 93-80 was promulgated in 1993.

A taxpayer should be entitled to rely on the IRS's guidance on the application of the law regarding the abandonment of a capital asset.125 The general legal standards described in Revenue Ruling 93-80 regarding the abandonment of a partnership interest should be considered to be equally applicable to the abandonment of stock because stock,126 like a partnership interest,127 is an intangible capital asset. A taxpayer evaluating the tax treatment of the abandonment of stock should also be able to rely on Revenue Ruling 93-80. Counsel for the IRS, by asserting in response to the Tax Court's Sua Sponte Order that Section 1234A(1) applies to the abandonment of direct ownership of an intangible capital asset, effectively argued against, and took a position that is contrary to, its own position in Revenue Ruling 93-80. The IRS has not revoked or modified Revenue Ruling 93-80 since its promulgation, and thus should not be permitted to ignore this ruling in this situation.128

The grounds on which the Tax Court attempts to distinguish Revenue Ruling 93-80, namely that the ruling provides that the loss is capital if the transaction is required to be treated as a sale or exchange, are unavailing.129 Revenue Ruling 93-80 does provide that "[w]hether a loss from the abandonment or worthlessness of a partnership interest is capital or ordinary depends on whether or not the loss results from the sale or exchange of a capital asset." Nevertheless, in making this determination, the ruling focused on whether there was an actual or deemed distribution in the transaction (e.g., a reduction in an allocable share of partnership liabilities, which is treated as a deemed distribution) and on whether the transaction was otherwise in substance a sale or exchange (e.g., whether the partner abandoning the partnership interest received consideration from another partner).130 Accordingly, the ruling focused on whether a sale or exchange occurred as a result of the receipt or deemed receipt of consideration from the partnership. If there is no actual or deemed receipt of consideration, such as here, Revenue Ruling 93-80 holds that the taxpayer's loss is an ordinary loss.

 

3. Revenue Ruling 2009-13

 

Revenue Ruling 2009-13131 addresses the question of whether income received on the surrender of a life insurance contract is capital gain or ordinary income. The ruling provides that a life insurance contract is a capital asset (which no doubt, like the Securities, had inherent rights or obligations), but then concludes that, despite this, the surrender of a life insurance contract does not produce a capital gain.132 In reaching this conclusion, Revenue Ruling 2009-13 references a 1964 revenue ruling, which had stated that "proceeds received by an insured upon the surrender of . . . a life insurance policy constitutes ordinary income."133 Revenue Ruling 2009-13 then provides that "Section 1234A, originally enacted in 1981, does not change this result." Thus, in 2009, the IRS again reiterated its position that Section 1234A(1) does not apply to the disposition of an intangible capital asset where the underlying property is not, nor would be on acquisition, a capital asset.

E. The Tax Court Misinterpreted the Legislative History to Section 1234A and Placed Undue Emphasis on the Reference to Fairbanks v. United States

In the Opinion, the Tax Court states that "[w]e think Congress' intent that section 1234A also apply to rights inherent in the property is evidenced by the committee's example of the redemption of a bond which, like a share of stock, is intangible property -- a bundle of contractual rights."134 Then, in what reads like a non sequitur, the Tax Court goes on to state in the Opinion that "[t]he example of a redemption of a bond is most significant given that Congress had long since overturned the result in Fairbanks by enacting the predecessor of section 1271(a) in the Revenue Act of 1934, ch. 277, sec. 117, 48 Stat. at 714-715."135

It is unclear how Fairbanks v. United States136 could be "most significant" to the interpretation of Section 1234A given that Congress addressed the situation at issue in that case more than 60 years before Section 1234A(1) was amended in 1997.137 Curiously, the Opinion references this prior law, noting that Congress had long since overturned the result in Fairbanks, but still found the reference to Fairbanks to be significant.138

The legislative history to the amendment to Section 1234A in 1997 unquestionably demonstrates that Fairbanks served simply as an illustration of the general "sale or exchange" litigation that had occurred in various contexts over the years. Several cases, including Fairbanks, were referenced by both the House Committee on the Budget and the Senate Committee on Finance in the "Present Law" sections of their reports on the Revenue Reconciliation Act of 1997 as examples of "[c]ourt decisions interpreting the "sale or exchange' requirement."139 Indeed, at the beginning of the paragraph discussing these cases, which generally address the cancellation of a contract or a waiver of a contractual provision, both committees explain that "[t]here has been a considerable amount of litigation dealing with whether modifications of legal relationships between taxpayers is to be treated as a "sale or exchange.'"140 Cases concluding that relief from indebtedness, even though there was no personal liability, on the abandonment of property constitutes a "sale" were also referenced by the Senate Committee on Finance in the "Present Law" section of its report that was providing examples of "[c]ourt decisions interpreting the "sale or exchange' requirement."141 Notably absent, however, was any reference to the cases that have held that there is no sale or exchange on the abandonment of property that is a capital asset when there is no relief of liabilities.142

There is no indication in the legislative history that Congress was seeking to address the particular situations at issue in the "sale or exchange" cases referenced in the "Present Law" section or to override the Code provisions previously enacted to address the situations at issue in those cases.143 Had Congress, for example, been seeking to override decades of case law requiring there to be relief from indebtedness in order for an abandonment of a capital asset to be treated as a sale or exchange, Congress presumably would have made some reference to those cases in the "Explanation of Provision" section of the legislative history to the 1997 amendment to Section 1234A(1). The legislative history, however, is void of any such reference.

The clear implication is that the House Committee on the Budget and the Senate Committee on Finance were simply using these cases as illustrations of the general "sale or exchange" litigation that had occurred in various contexts over the years, and not as examples of situations Congress expected would be addressed by its revision to Section 1234A(1). Accordingly, the Tax Court mistakenly imported significance to the reference to Fairbanks in the legislative history to the 1997 amendment to Section 1234A. The reference to Fairbanks and the other cases merely served as an illustration of the general "sale or exchange" litigation that had occurred in various contexts over the years. It did not serve as evidence that Congress was using the 1997 amendment to Section 1234A(1) to eliminate the look-through rule and extend Section 1234A(1) to the termination, etc. of direct ownership of capital assets. Such a significant change would presumably have received at least some attention in the "Explanation of Provision" section of the legislative history, but that did not happen.

 

CONCLUSION

 

 

For the foregoing reasons, the decision of the Tax Court should be reversed, and judgment should be entered for Pilgrim's Pride.
Respectfully submitted,

 

 

Robert H. Albaral

 

Texas Bar No. 00969175

 

 

Todd A. Schroeder

 

Texas Bar No. 24037454

 

 

Baker & McKenzie LLP

 

2300 Trammell Crow Center

 

2001 Ross Avenue

 

Dallas, Texas 75201

 

(214) 978-3000

 

 

Attorneys for Appellant,

 

Pilgrim's Pride Corporation

 

FOOTNOTES

 

 

1 For ease of discussion, we generally refer to Appellant as "Pilgrim's Pride" when discussing the issues presented in this case.

2 Decision p. 1; Notice of Appeal p. 1.

3 Unless otherwise noted, all "Section" references are to the corresponding sections of the Internal Revenue Code of 1986, as amended, 26 U.S.C. § 1 et seq. ("Code"), and all "Regulations" or "Treas. Reg. § " references are to the Treasury Regulations, 26 C.F.R. § 1.0-1 et. seq., promulgated thereunder.

4 Petition p. 1-4.

5 Tax Court Opinion p. 4; Petition p. 1.

6 Decision p. 1; Notice of Appeal p. 1; Fed. R. App. P. 13(a)(1)(A); Tax Court Rule 190(a).

7 Petition p. 1.

8 Stipulation of Fact p. 1-13; Order Dated May 19, 2011 p. 1.

9 Opening Brief for Respondent; Petitioner's Opening Brief; Reply Brief for Respondent; Petitioner's Reply Brief.

10 Order Dated May 21, 2012 p.1.

11 Order Dated June 29, 2012 p. 1-2. (ordering supplemental briefing regarding Treas. Reg. § 1.165-4, the nature of the securities as stock or non-stock, and authorities holding that abandonment of a non-worthless security can support a deductible loss under Section 165(a)). The 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. Supplemental Reply Brief for Respondent p. 3-7; Petitioner's Supplemental Reply Brief p. 1-7, 9-13. Appellant also provided authorities concluding that abandonment is a separate and distinct ground for the allowance of an ordinary loss deduction under Section 165(a), without regard to the value of the property that is abandoned. Petitioner's Supplemental Reply Brief p. 7-8, 13-16.

12See Petitioner's Opening Brief p. 15-22; Petitioner's Reply Brief p. 22-23; Petitioner's Supplemental Reply Brief p. 6-8, 13-16.

13See Opening Brief for Respondent p. 17-20; Reply Brief for Respondent p. 6-8; Supplemental Reply Brief for Respondent p. 4-5. Section 165(g) generally treats the loss that is incurred when a security becomes worthless as being a loss from the sale or exchange of a capital asset.

14 Order Dated April 23, 2013 p. 1.

15 Order Dated May 20, 2013 p. 3.

16Id.

17 Second Supplemental Reply Brief for Respondent; Petitioner's Second Supplemental Reply Brief.

18 Second Supplemental Reply Brief for Respondent p. 4.

19 Reply Brief for Respondent p. 8.

20 Tax Court Opinion.

21 Tax Court Opinion p. 3.

22 Tax Court Opinion p. 30.

23 Motion for Reconsideration. Pilgrim's Pride also moved, on January 10, 2014, for full Tax Court review of the Opinion. Motion for Full Court Review.

24 Order Dated January 15, 2014 p. 1. Response to Petitioner's Motion for Reconsideration.

25 Order Dated March 6, 2014 p. 4. The Tax Court also denied Pilgrim's Pride's motion for full court review on March 6, 2014.

26 Decision p. 1.

27 Tax Court Opinion p. 4.

28 Tax Court Opinion p. 4. Note that this brief generally refers to "Pilgrim's Pride" rather than "GK Co-op" when discussing the issues presented in this case, but continues to refer to GK Co-op with respect to certain actions carried out by GK Co-op.

29 Tax Court Opinion p. 4-6.

30 Tax Court Opinion p. 7-8.

31 Tax Court Opinion p. 8.

32Id.

33Id.

34Id.; Stipulation of Fact p. 7.

35 Tax Court Opinion p. 9; Stipulation of Fact p. 9.

36 Tax Court Opinion p. 9; Stipulation of Fact p. 10.

37 Tax Court Opinion p. 10.

38 Tax Court Opinion p. 9; Stipulation of Fact p. 9.

39 Order Dated March 6, 2014 p. 3.

40 Tax Court Opinion p. 13, 30.

41Herrera v. Comm'r, 544 Fed. Appx. 592, 594 (5th Cir. 2013).

42 Stipulation of Fact p. 1-13; Order Dated May 19, 2011 p. 1.

43See e.g., Echols v. Comm'r, 935 F.2d 703, 705 (5th Cir. 1991) (noting that Section 165(a) states the "general rule").

44See supra note 13.

45 Petitioner's Opening Brief p. 18-29.

46 Petitioner's Reply Brief p. 6-20, 22-23.

47Boehm v. Comm'r, 326 U.S. 287, 293 (1945).

48 Tax Court Opinion p. 9; Stipulation of Fact p. 9.

49 Order Dated March 6, 2014 p. 3. See also Echols v. Comm'r, 950 F.2d 209, 211 (5th Cir. 1991) (explaining that worthlessness and abandonment are separate and distinct reasons for taking a loss under Section 165).

50 Order Dated March 6, 2014 p. 3.

51Echols v. Comm'r, 935 F.2d 703 (5th Cir. 1991) (concluding the taxpayer was allowed an ordinary loss deduction under Section 165(a) under two alternative grounds: (i) abandonment of partnership interest, or (ii) worthlessness of partnership interest).

52Citron v. Comm'r, 97 T.C. 200 (1991) (declining to impute sale or exchange treatment to the abandonment of a partnership interest and holding that taxpayer's loss was ordinary); Gannon v. Comm'r, 16 T.C. 1134 (1951) (declining to treat taxpayer's loss of his partnership interest as a sale or exchange where no consideration was received and concluding taxpayer's loss was ordinary), acq., 1951-2 C.B. 1.

53 Rev. Rul. 93-80, 1993-2 C.B. 239 (holding, in part, that when a taxpayer abandons a partnership interest and does not receive an actual or deemed distribution from the partnership, the taxpayer is entitled to an ordinary loss under Section 165(a)). See also IRS Publication 544, Sales and Other Dispositions of Assets, at 4 (For use in preparing 2004 Returns) ("Loss from abandonment of business or investment property is deductible as an ordinary loss, even if the property is a capital asset.").

54 Stipulation of Fact p. 7.

55 As noted above, the parties agreed that no "sale or exchange" occurred in this instance.

56 Economic Recovery Tax Act of 1981, Pub. L. No. 97-34, § 507(a), 95 Stat. 172, 333 (1981).

57United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241 (1989).

58Conn. Nat'l Bank v. Germain, 503 U.S. 249, 253-54 (1992); Ron Pair Enters., Inc., 489 U.S. at 240-42.

59Fed. Deposit Ins. Corp. v. Meyer, 510 U.S. 471, 476 (1994) ("[W]e construe a statutory term in accordance with its ordinary or natural meaning."); Crane v. Comm'r, 331 U.S. 1, 6 (1947); Old Colony R.R. Co. v. Comm'r, 284 U.S. 552, 560 (1932) ("The legislature must be presumed to use words in their known and ordinary signification.") (internal quotations omitted).

60See also I.R.S. Chief Couns. Adv. 200851051 (Oct. 27, 2008) and I.R.S. Chief Couns. Adv. 200851052 (Oct. 27, 2008), which state that "Section 1234A applies to "rights with respect to' capital assets -- that is, derivative interests" and "[n]ot to ownership interests in capital assets."

61 Merriam-Webster defines the term "derivative", in relevant part, as "a contract or security that derives its value from that of an underlying asset (as another security) or from the value of a rate (as of interest or currency exchange) or index of asset value (as a stock index)." Merriam-Webster, http://www.merriam-webster.com/dictionary/derivative (last visited June 13, 2014).

62Arkansas Best v. Comm'r, 485 U.S. 212, 223 (1988).

63 Tax Court Opinion p. 14-15.

64See Petitioner's Second Supplemental Reply Brief p. 7-8. Furthermore, on the transfer or other disposition of stock, any such inherent rights associated with ownership move with the stock, and in the case of the Securities, if any, were moved to Southern States when the Securities were abandoned back to the company.

65 In addition, as discussed in Petitioner's Second Supplemental Reply Brief, the Tax Court's interpretation of Section 1234A(1) creates irreconcilable conflicts with other provisions of the Code and Regulations. Petitioner's Second Supplemental Reply Brief p. 34-37.

66Phillips v. Comm'r, 114 T.C. 115, 125 (2000) (citing Duke v. Univ. of Tex., 663 F.2d 522, 526 (5th Cir. 1981)). See also Doe v. United States, 398 F.3d 686, 688 (5th Cir. 2005) ("When interpreting a statute, we start with the plain text, and read all parts of the statute together to produce a harmonious whole.").

67Dolan v. U.S. Postal Serv., 546 U.S. 481, 486 (2006).

68United States v. Am. Trucking Ass'ns, Inc., 310 U.S. 534, 542-43 (1940).

69Burnett Ranches, Ltd. v. United States, No. 13-10403, 2014 U.S. App. LEXIS 9545, at *18 (5th Cir. 2014) (quoting Kashanchi v. Tex. Commerce Med. Bank, N.A., 703 F.2d 936, 939 (5th Cir. 1983).

70 Sections 1234A(1), (2). The flush language of Section 1234A, which provides that the preceding sentence shall not apply to the retirement of any debt instrument (whether or not through a trust or other participation arrangement), makes clear that the retirement of an indirectly owned debt instrument is not subject to Section 1234A. See infra notes 94-97 and associated text.

71See Section 1221(a) (defining the term "capital asset" as "property held by the taxpayer. . . ."). With certain exceptions that are not applicable here, Section 1256(b)(1) defines the term "section 1256 contract" to mean any (i) regulated futures contract, (ii) foreign currency contract, (iii) nonequity option, (iv) dealer equity option, and (v) dealer securities futures contract.

72See Burnett Ranches, Ltd. v. United States, No. 13-10403, 2014 U.S. App. LEXIS 9545, at *18 (5th Cir. 2014).

73 Tax Court Opinion p. 20, 25-26.

74 Technical Corrections Act of 1982, Pub. L. No. 97-448, § 105(e), 96 Stat. 2365, 2387 (1983).

75 Section 1234A(2) was added in 1983 to address the termination of cash settled regulated futures contracts. See infra notes 88-91 and associated text.

76 Consolidated Appropriations Act, 2001, Pub. L. No. 106-554, § 1(a)(7) (Title IV, § 401(b)), 114 Stat. 2763, 2763A-648-649 (2000). In 2002, Congress amended the Code to move the termination of securities futures contracts to Section 1234B and as part of this reorganization, removed paragraph (3) from Section 1234A. See Job Creation and Worker Assistance Act of 2002, Pub. L. No. 107-147, § 412(d)(1), 116 Stat. 21, 53 (2002).

77 Tax Court Opinion p. 25-26.

78 Consolidated Appropriations Act, 2001, Pub. L. No. 106-554, § 1(a)(7) (Title IV, § 401(b)), 114 Stat. 2763, 2763A-648-649 (2000).

79 Economic Recovery Tax Act of 1981, Pub. L. No. 97-34, § 507(a), 95 Stat. 172, 333 (1981). As explained by the Tax Court, "Section 1234A was added by the Economic Recovery Tax Act of 1981 . . . when Congress adopted a number of provisions dealing with offsetting contractual interests in actively traded personal property commonly known as straddles." Tax Court Opinion p. 20 (emphasis added).

80 Economic Recovery Tax Act of 1981, Pub. L. No. 97-34, § 507(a), 95 Stat. 172, 333 (1981).

81See Commodity Straddles Tax Act of 1981, S. 626, 97th Cong., § 6, (1981) (the Moynihan bill) (emphasis added).

82Commodity Tax Straddles: Hearing Before the Subcomm. on Taxation and Debt Mgmt. and the Subcomm. on Energy and Agric. Taxation of the Comm. on Fin. of the U.S. Senate, 97th Cong. 44 (1981) (Background on Commodity Tax Straddles and Explanation of S. 626, at 28).

83 "[W]e propose that the sale or exchange requirement of current law be eliminated. Thus, any disposition of a capital asset would yield a capital gain or loss. Our proposal on this point is identical to the provision contained in [the Moynihan Bill]." Id. at 65 (statement of Hon. John E. Chapoton, Assistant Sec'y for Tax Policy).

84See Economic Recovery Tax Act of 1981, H.J. Res. 266, 97th Cong. § 507(a) (1981); S. Rep. No. 97-144, at 170-71 (1981).

85 S. Rep. No. 97-144, at 170 (1981).

86Id. at 170.

87Id. at 171.

88 Technical Corrections Act of 1982, Pub. L. No. 97-448, § 105(e), 96 Stat. 2365, 2387 (1983).

89Id.

90 Technical Corrections Act of 1982, Pub. L. No. 97-448, § 105(c)(5)(A), 96 Stat. 2365, 2385 (1983).

91 H.R. Rep. No. 97-794, at 23 (1982).

92 Deficit Reduction Act of 1984, Pub. L. No. 98-369, § 102(e)(4), 98 Stat. 494, 624 (1984).

93 Deficit Reduction Act of 1984, Pub. L. No. 98-369, § 102(a)(2), 98 Stat. 494, 620 (1984).

94 Deficit Reduction Act of 1984, Pub. L. No. 98-369, § 102(e)(9), 98 Stat. 494, 625 (1984).

95 H.R. Rep. No. 98-861, 87 Cong. Rec. 130, H 6617 (1984) (Conf. Rep.).

96 Staff of Joint Comm. On Taxation, General Explanation of the Revenue Provisions of the Deficit Reduction Act of 1984, at 316 (1984), JCS-41-84 (internal citations omitted) (emphasis added).

97 The definition of "personal property" in Section § 1092(d) was also amended in 1984 to include stock in certain situations. Deficit Reduction Act of 1984, Pub. L. No. 98-369, § 101(b), 98 Stat. 494, 618 (1984). See also Petitioner's Second Supplemental Reply Brief p. 13-14.

98 Taxpayer Relief Act of 1997, Pub. L. No. 105-34, § 1003(a), 111 Stat. 788, 909-910 (1997).

99 H.R. Rep. No. 105-148, at 451-455 (1997).

100 H.R. Rep. No. 105-148, at 454 (1997); S. Rep. No. 105-33, at 135-136 (1997).

101 H.R. Rep. No. 105-148, at 454 nn.13-14 (1997); S. Rep. No. 105-33, at 135-136 n.80-81 (1997).

102Billy Rose's Diamond Horseshoe, Inc. v. United States, 448 F.2d 549 (2d Cir. 1971); Sirbo Holdings, Inc. v. Comm'r, 509 F.2d 1220 (2d Cir. 1975).

103U.S. Freight Co. v. United States, 422 F.2d 887 (Ct. Cl. 1970).

104 H.R. Rep. No. 105-148, at 454 (1997); S. Rep. No. 105-33, at 135-136 (1997).

105See Petitioner's Second Supplemental Reply Brief p. 14-22.

106 H.R. Rep. No. 105-148, at 453 (1997) (emphasis added); S. Rep. No. 105-33, at 134 (1997) (emphasis added).

107 H.R. Rep. No. 105-148, at 453-454 (1997) (emphasis added).

108 Tax Court Opinion p. 25-26.

109 Even the Tax Court had previously held after 1997 that the loss on the abandonment of stock and an intangible asset is an ordinary loss under Section 165(a). Alami El Moujahid v. Comm'r, T.C. Memo 2009-42. In Alami El Moujahid, the Tax Court held that the taxpayer was allowed an ordinary loss deduction in 2005 under Section 165(a) for the amount it paid for the stock of a corporation that it abandoned, and the amount it paid to acquire the franchise (an intangible asset) it abandoned. Id.

110 Prop. Treas. Reg. § 1.165-5(i), 72 Fed. Reg. 41468 (July 30, 2007); T.D. 9386, 73 Fed. Reg. 13124 (Mar. 12, 2008). On its face, Treas. Reg. § 1.165-5(i) only "applies to any abandonment of stock or other securities after March 12, 2008." Treas. Reg. § 1.165-5(i)(2). GK Co-op abandoned the Securities on June 24, 2004, almost four years prior to the effective date of Treas. Reg. § 1.165-5(i). Tax Court Opinion p. 8; Stipulation of Fact p. 7. Therefore, Treasury and the IRS have dictated, by the very terms of the Regulation itself, that it does not apply to this case.

111 Tax Court Opinion p. 24.

112See Preamble, Prop. Treas. Reg. § 1.165-5(i), 72 Fed. Reg. 41468 (July 30, 2007); T.D. 9386, 73 Fed. Reg. 13124 (Mar. 12, 2008).

113 Preamble, Prop. Treas. Reg. § 1.165-5(i), 72 Fed. Reg. 41468 (July 30, 2007).

114 Section 165(g)(3) provides that a taxpayer's loss upon the worthlessness of a security is an ordinary loss if the security is in a corporation where (i) the taxpayer owns at least 80% of the stock of the corporation, and (ii) more than 90% of the corporation's gross receipts is from sources other than certain passive sources that are listed in the statute.

115 The Supreme Court has made it clear that when a statute is unambiguous, there is no statutory gap for any agency to fill and thus no room for agency discretion in the construction of the statute. United States v. Home Concrete & Supply, LLC, 132 S. Ct. 1836, 1843 (2012).

116See T.D. 9386; Treas. Reg. § 1.165-5(i)(2).

117 Tax Court Opinion p. 27.

118Id.

119See Revenue Act of 1942, Pub. L. No. 77-753, § 123(a)(1), 56 Stat. 798, 820 (1942). Moreover, the more specific provision does not always control the more general provision as the Tax Court indicates. Tax Court Opinion p. 27. Rather, the general provision controls where its purpose would be undermined by allowing the more specific provision to control. Xilinx, Inc. v. Comm'r, 598 F.3d 1191, 1196-97 (9th Cir. 2010). Indeed, if, as the Tax Court indicates, the purpose of Section 1234A was to treat all terminations of direct ownership of capital assets as a sale or exchange of a capital asset (which Appellant asserts it was not), then the purpose of Section 1234A would be undermined by an "exception" such as Section 165(g)(3).

120 1993-2 C.B. 239.

121 Emphasis added.

122 Tax Court Opinion p. 29.

123Id.

124See I.R.S. Chief Couns. Adv. 200637032 (Sept. 2, 2005); MSSP Training Guide, Partnership, Chapter 7 -- Dispositions of Partnership Interest (Rev. 3-2008).

125See Estate of Delaune v. United States, 143 F.3d 995, 1005 (5th Cir. 1998) ("As we recently held in Estate of McLendon . . . "the Commissioner will be held to his published rulings in areas where the law is unclear, and may not depart from them in individual cases.' Although the issue in McLendon concerned a Revenue Ruling, its rule applies a fortiori in the case of a bona fide treasury regulation, and the Commissioner may not escape the effect of [a Treasury Regulation] on the admittedly murky question posed by this case. Indeed, we are a little perturbed that he would even try."); Estate of McLendon v. Comm'r, 135 F.3d 1017, 1024-25 (5th Cir. 1998) (concluding that the Commissioner had no right to ignore its own revenue ruling and that the Tax Court was bound to apply the revenue ruling consistent with the taxpayer's right of reliance); Silco, Inc. v. United States, 779 F.2d 282, 287 (5th Cir. 1986) (concluding that taxpayer was entitled to rely on the revenue rulings in effect at the time of its transaction, even though such revenue rulings were not identical to the taxpayer's facts and even though the revenue rulings had been subsequently abrogated); Rauenhorst v. Comm'r, 119 T.C. 157, 183 (2002) (explaining that "the Commissioner's failure to follow his own rulings would be unfair to those taxpayers, such as petitioners herein, who have relied on revenue rulings to structure their transactions . . . we shall not permit respondent to argue against his revenue ruling, and we shall treat his revenue ruling as a concession"). Cf. Gray v. United States, 553 F.3d 410, 413 n.1 (5th Cir. 2008) (noting that significant weight is generally accorded to the determinations of the IRS in its revenue rulings, but that a conflict between a revenue ruling and a statute must be resolved by the statute).

126See Arkansas Best, 485 U.S. 212, 223 (1988).

127See Section § 741; Citron v. Comm'r, 97 T.C. 200, 213 (1991); Rev. Rul. 93-80.

128See supra note 125.

129 Tax Court Opinion p. 29.

130 Rev. Rul. 93-80.

131 2009-1 C.B. 1029.

132Id.

133 Rev. Rul. 64-51, 1964-1 C.B. 322.

134 Tax Court Opinion p. 24.

135 Tax Court Opinion p. 25.

136 306 U.S. 436 (1939).

137See Revenue Act of 1934, § 117(f), 28 Stat. 680, 714-175 (1934).

138 Tax Court Opinion p. 25.

139 H. Rep. No. 105-148, at 451-453 (1997); S. Rep. No. 105-33, at 132-134 (1997).

140 S. Rep. No. 105-33, at 132-133 (1997); H. Rep. No. 105-148, at 451-452 (1997).

141 S. Rep. No. 105-33, at 132-133 (1997).

142See e.g., Echols v. Comm'r, 935 F.2d 703 (5th Cir. 1991), reh'g denied, 950 F.2d 209 (5th Cir. 1991); Citron v. Comm'r, 97 T.C. 200 (1991).

143 For a discussion of the cases cited in the legislative history to the 1997 amendment to Section 1234A(1) and the Code provisions enacted to address the situations at issue in those cases, see Motion for Reconsideration p. 19-20.

 

END OF FOOTNOTES
DOCUMENT ATTRIBUTES
  • Case Name
    PILGRIM'S PRIDE CORPORATION, SUCCESSOR IN INTEREST TO PILGRIM'S PRIDE CORPORATION OF GEORGIA, FORMERLY KNOWN AS GOLD KIST, INCORPORATED, SUCCESSOR IN INTEREST TO GOLD KIST, INCORPORATED AND SUBSIDIARIES, Petitioner-Appellant v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee
  • Court
    United States Court of Appeals for the Fifth Circuit
  • Docket
    No. 14-60295
  • Authors
    Albaral, Robert H.
    Schroeder, Todd A.
  • Institutional Authors
    Baker & McKenzie LLP
  • Cross-Reference
    Appealing Pilgrim's Pride Corp. v. Commissioner, 141 T.C. No.

    17 (2014) 2013 TNT 239-17: Court Opinions.

    Government Brief in Pilgrim's Pride Corp. v. Commissioner, No.

    14-60295 (2014) 2014 TNT 163-13: Justice Department Briefs.
  • Code Sections
  • Subject Area/Tax Topics
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2014-20666
  • Tax Analysts Electronic Citation
    2014 TNT 163-14
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