Rojas v. Commissioner

¶1dissenting: I agree with and join the dissenting opinions of Judges Nims and Hamblen and write this to add two brief observations.

¶2The majority opinion appears to acknowledge that tax-benefit rule principles apply even though the expenditures and liquidation occurred in the same taxable year. In note 8, the majority concedes that the Supreme Court in Bliss Dairy found it of no consequence whether the application of these principles takes place by way of reducing or eliminating a deduction or increasing income. In light of this, I believe that the majority places unwarranted reliance upon section 464 and its allowance of deductions for items “used or consumed.” Deductions allowed by section 464 are restricted to deductions “otherwise allowable under this chapter.” Since the tax-benefit rule and its effect of canceling out deductions was in effect at the time section 464 was enacted, the first question is whether tax-benefit rule principles effectively precluded deductibility aside from anything contained in section 464. Section 464 itself is irrelevant to this inquiry.

¶3The majority notes that neither party suggested the applicability of section 268. I feel that section 268 should be mentioned, however, because adoption of the majority opinion will cause different results depending upon whether the tax results of a liquidation are governed by section 336 or section 337. Section 268 provides that no deduction shall be allowed which is attributable to the production of crops which have been sold with the land and afforded capital gains treatment. The purpose of section 268 is to disallow deductions when they are inconsistent with a later event, i.e., ordinary income property (unharvested crops) being converted to section 1231 property which is capable of producing capital gain.1 See S. Rept. 781, 82d Cong., 1st Sess. 47-48 (1951). Section 268 would appear to be a partial codification of tax-benefit rule principles.

¶4The unharvested crops in the instant case were disposed of at the same time as the land, and would have qualified as section 1231 property if a recognizable sale or exchange had occurred.

¶5In Beauchamp & Brown Groves Co. v. Commissioner, 44 T.C. 117 (1965), affd. 371 F.2d 942 (9th Cir. 1967), we held that a liquidation under the provisions of section 337 triggers the operation of section 268, thereby disallowing deductions attributable to the production of an unharvested crop that is sold with the land. The fact that there was no recognizable gain which could be characterized by section 1231 did not prevent the application of section 268. In Teget v. United States, 407 F. Supp. 681 (D. S.D. 1976), revd. and remanded on another issue 552 F.2d 236 (8th Cir. 1977), the District Court construed section 268 and held that a mail order seed and nursery company which sold its land and unharvested crop was not entitled to a deduction for the cost of an unharvested crop, although no gains were in fact recognized in the section 337 12-month complete liquidation.

¶6The majority opinion states that the corporation adopted its plan of liquidation under section 337. Had it followed through and sold the land and unharvested crops together, section 268 would have applied. It appears, however, that section 336 controls the tax consequences of the liquidation that actually took place.

¶7Application of tax-benefit rule principles to a section 336 liquidation produces the same result with respect to the unharvested crops that section 268 produces in a section 337 liquidation. The majority opinion, however, produces diametrically opposite results depending upon whether the tax consequences of the liquidation are controlled by section 336 or section 337. Given the Supreme Court’s finding that “The very purpose of section 337 was to create the same consequences as section 336” (Hillsboro National Bank v. Commissioner, and United States v. Bliss Dairy, Inc., 460 U.S. 370, 401 (1983)), we should decide this case in a manner that results in the consistency advocated by the Supreme Court.

¶8Chabot, Parker, Jacobs, and Parr, JJ., agree with this dissent.