533

PILGRIM’S PRIDE CORPORATION SUCCESSOR IN INTEREST TO

PILGRIM’S PRIDE CORPORATION OF GEORGIA F.K.A. GOLD

KIST, INC. SUCCESSOR IN INTEREST TO GOLD KIST INC. 

AND SUBSIDIARIES, PETITIONER v. COMMISSIONER OF

INTERNAL REVENUE, RESPONDENT

Docket No. 12089–10. Filed December 11, 2013. 

P is the successor in interest to G. G was contractually obligated to purchase, and in 1999 did purchase, securities from 

S and T for $98.6 million. The securities were capital assets 

of G. In 2004 S offered to redeem the securities for $20 million. G’s board of directors decided to abandon the securities 

for no consideration because a $98.6 million ordinary loss 

would produce tax savings greater than the $20 million 

offered by S. On June 24, 2004, G voluntarily surrendered the 

securities to S and T for no consideration. On its Federal 

income tax return for the tax year ending June 30, 2004, G 

reported a $98.6 million ordinary abandonment loss deduction 

under I.R.C. sec. 165(a) pursuant to sec. 1.165–2(a), Income 

Tax Regs. An abandonment loss cannot be claimed on a sale 

or exchange of property. Sec. 1.165–2(b), Income Tax Regs. 

Pursuant to I.R.C. sec. 165(f) losses from sales or exchanges 

of capital assets are subject to the limitations on capital losses 

under I.R.C. secs. 1211 and 1212. I.R.C. sec. 1234A requires 

gain or loss attributable to the cancellation, lapse, expiration, 

or other termination of a right with respect to property that 

is (or on acquisition would be) a capital asset in the hands of 

534 141 UNITED STATES TAX COURT REPORTS (533) 

1 Unless otherwise indicated, all section references are to the Internal 

Revenue Code (Code) of 1986 in effect for the year at issue, and all Rule 

references are to the Tax Court Rules of Practice and Procedure. 2 Respondent concedes that petitioner is not liable for the accuracy-related penalty under sec. 6662(a) for the year at issue. 3On April 24, 2013, this case was reassigned by order of the Chief Judge 

to Judge Howard A. Dawson, Jr., for disposition. 

a taxpayer to be treated as gain or loss from the sale of a capital asset. Held: The securities are intangible property comprising rights that G had in the management, profits, and 

assets of S and T. Those rights were terminated when G 

surrendered the securities. Held, further, the $98.6 million 

loss on the surrender of the securities is attributable to the 

termination of G’s rights with respect to the securities, which 

are capital assets, and pursuant to I.R.C. sec. 1234A the loss 

is treated as a loss from the sale or exchange of capital assets. 

Held, further, G is not entitled to an ordinary loss deduction 

for abandonment, because the loss is treated as a loss from 

the sale or exchange of capital assets pursuant to I.R.C. sec. 

1234A. See sec. 1.165–2(b), Income Tax Regs. Held, further, 

pursuant to I.R.C. sec. 165(f), P’s losses from the surrender of 

the securities, deemed to be a sale or exchange under I.R.C. 

sec. 1234A, are subject to the limitations on capital losses 

under I.R.C. secs. 1211 and 1212. 

Robert H. Albaral and Todd A. Schroeder, for petitioner. 

John Wayne Duncan and J. Greg Marble, for respondent. 

OPINION 

DAWSON, Judge: Petitioner petitioned the Court pursuant 

to section 6213(a) and (f)(1) 1 for redetermination of a 

$29,682,682 deficiency in Federal income tax and a 

$5,936,536 accuracy-related penalty under section 6662(a) 

that respondent determined against petitioner as successor 

in interest to Gold Kist Inc. (GK Co-op), a Georgia cooperative marketing association, for its tax year ending June 30, 

2004. After a concession by respondent, 2 the only issue 

remaining for decision is whether a $98.6 million loss 

resulting from GK Co-op’s abandonment of certain securities 

in 2004 is ordinary or capital. 

Background 

This case was submitted fully stipulated pursuant to Rule 

122. 3 The stipulation of facts and the exhibits attached 

(533) PILIGRIM’S PRIDE CORP. v. COMMISSIONER 535

4Pursuant to an asset purchase agreement dated July 23, 1998, GK Coop agreed to sell one of its divisions to Southern States for approximately 

$255 million paid in part in cash and in part by Southern States’ assumption of certain liabilities. The sale was completed in October 1998. Southern States obtained a bridge loan which it expected to repay with funds 

raised in a public offering. As part of the financing arrangement, when 

Southern States failed to consummate the public offering by October 5, 

1999, it required GK Co-op to purchase the securities central to the issue 

in this case. Southern States and the Trust filed a Form S–1 with the U.S. 

Securities and Exchange Commission to register (i) capital securities in the 

Trust for sale to the public and (ii) common securities in the Trust for sale 

to Southern States. Southern States intended to use the proceeds from the 

sale of these securities to repay the outstanding principal balance of the 

bridge loan. 5The certificate evidencing the series B preferred stock states: 

This certifies that Gold Kist Inc. [GK Co-op] is the owner of Forty 

Thousand (40,000) fully-paid and non-assessable shares of the Step-Up 

Rate Series B Cumulative Redeemable Preferred Stock, of the par value 

of $100.00 each, with a stated liquidation preference of $1000.00 per 

share, of Southern States Cooperative, Incorporated (the ‘‘Association’’), 

transferable on the books of the Association by the holder hereof in perContinued 

thereto are incorporated herein by this reference. At the time 

petitioner filed its petition its principal place of business was 

in Pittsburg, Texas. 

Petitioner is a corporation organized under the laws of the 

State of Delaware. It is the successor in interest to Pilgrim’s 

Pride Corp. of Georgia f.k.a. Gold Kist, Inc., a Delaware corporation (GK Inc.), which was the successor in interest to 

Gold Kist Inc., a Georgia cooperative marketing association 

(GK Co-op). GK Co-op was organized as a cooperative 

association in 1936 under the Georgia Cooperative Marketing 

Act. Beginning in 1978, GK Co-op was taxed as a nonexempt 

cooperative under subchapter T of the Code and was required 

to file an annual Form 990–C, Farmers’ Cooperative Association Income Tax Return. 

In 1999 GK Co-op was contractually required to purchase 

certain securities for an aggregate total of $98.6 million from 

Southern States Cooperative, Inc. (Southern States), and 

Southern States Capital Trust I (Trust), a Delaware statutory trust established by Southern States. 4 Consequently, on 

October 5, 1999, GK Co-op purchased 40,000 shares of StepUp Rate Series B Cumulative Redeemable Preferred Stock 

(series B preferred stock) 5 of Southern States for $39.2 milVerDate Mar 15 2010 09:52 Feb 03, 2015 Jkt 000000 PO 00000 Frm 00003 Fmt 3857 Sfmt 3857 V:\FILES\BOUNDV~1.WIT\BVACDB~1.141\PILIGR~1 JAMIE
536 141 UNITED STATES TAX COURT REPORTS (533) 

son or by duly authorized attorney upon the surrender of this certificate 

properly endorsed. 

* * * * * * * 

The Association will furnish to any stockholder without charge, upon 

written request, a full statement of the designations, preferences, limitations and relative rights of the shares of the Step-Up Rate Series B Cumulative Redeemable Preferred Stock and to each other class or series 

of shares of the Association. 

The shares represented hereby have not been registered under the Securities Act of 1933 or under the securities laws of any state and are 

subject to certain restrictions on the transfer hereof, which restrictions 

are set forth in Section 9 of Article C(1)(c) of the Articles of Incorporation 

of the Association and in a Purchase Agreement of even date herewith 

between the Association and Gold Kist Inc. 

6The certificate evidencing the series A securities states: 

Southern States Capital Trust I, a statutory business trust created 

under the laws of the State of Delaware (the ‘‘Issuer Trust’’), hereby certifies that Gold Kist, Inc. [GK Co-op] (the ‘‘Holder’’) is the registered 

owner of Sixty thousand (60,000) capital securities (aggregate Liquidation Amount Sixty Million ($60,000,000) Dollars) of the Issuer Trust representing a preferred undivided beneficial interest in the assets of the 

Issuer Trust and designated the Step-up Rate Capital Securities, Series 

A (liquidation amount $1,000 per Capital Security) (the ‘‘Capital Securities’’). The Capital Securities are transferable on the books and records 

of the Issuer Trust, in person or by a duly authorized attorney, upon surrender of this certificate duly endorsed and in proper form for transfer 

as provided in Section 5.5 of the Trust Agreement (as defined below). 

The designations, rights, privileges, restrictions, preferences and other 

terms and provisions of the Capital Securities are set forth in, and this 

certificate and the Capital Securities represented hereby are issued and 

shall in all respects be subject to the terms and provisions of, the 

Amended and Restated Trust Agreement of the Issuer Trust, dated as 

of October 5, 1999, as the same may be amended from time to time (the 

‘‘Trust Agreement’’), among Southern States Cooperative, Incorporated, 

an agricultural cooperative corporation organized under the laws of Virginia, as Depositor, First Union National Bank, as Property Trustee, 

First Union Trust Company, National Association, as Delaware Trustee, 

and the Administrative Trustees named therein, including the designation of the terms of the Capital Securities as set forth therein. The Holder is entitled to the benefits of the Guarantee Agreement, dated as of 

October 5, 1999 (the ‘‘Guarantee Agreement’’), entered into by Southern 

States Cooperative, Incorporated and First Union National Bank, as 

guarantee trustee, to the extent provided therein. The Issuer Trust will 

furnish a copy of the Trust Agreement and the Guarantee Agreement to 

the Holder without charge upon written request to the Issuer Trust at 

lion and 60,000 shares of Step-Up Rate Capital Securities, 

Series A (series A securities) 6 issued by the Trust for $59.4 

(533) PILIGRIM’S PRIDE CORP. v. COMMISSIONER 537

its principal place of business or registered office. 

Upon receipt of this certificate, the Holder is bound by the Trust 

Agreement and is entitled to the benefits thereunder. 

7The terms of the Securities neither required Southern States to offer 

to redeem the Securities from GK Co-op nor required GK Co-op to accept 

such an offer or make a counteroffer. 

million. The series B preferred stock and the series A securities, collectively referred to herein as the Securities, are securities as defined in section 165(g)(2). 

The Securities generally provided for quarterly dividend 

payments that under certain circumstances could be unilaterally deferred by Southern States. Southern States ceased 

paying and began to defer the quarterly dividends payable on 

the series B preferred stock beginning with the April 2002 

quarterly dividend. In October 2002 Southern States notified 

GK Co-op that the quarterly dividends on the series A securities for that quarter and subsequent quarters were deferred 

and would not be paid by Southern States. 

In early 2004 Southern States offered to redeem the Securities from GK Co-op for less than GK Co-op had paid for 

them. 7 At that time GK Co-op was planning to merge with 

and into its wholly owned subsidiary GK Inc., a for-profit 

business corporation taxable under subchapter C of the Code, 

and to take the company public shortly after the end of its 

2004 tax year. GK Co-op made a counteroffer of $31.5 million 

in May 2004 because it wanted to dispose of the Securities 

and remove them from its balance sheet before making the 

public offering. Southern States rejected GK Co-op’s 

counteroffer and instead proposed to redeem the Securities 

for $20 million. 

At a meeting held on May 24, 2004, GK Co-op’s board of 

directors decided to abandon the Securities for no consideration because a $98 million ordinary loss would produce tax 

savings greater than the $20 million offered by Southern 

States. As a result, GK Co-op rejected the $20 million offer 

and ceased all negotiations with Southern States. At the 

time, GK Co-op valued the Securities at $38.8 million on its 

Generally Accepted Accounting Principles (GAAP) financial 

statements. 

On June 24, 2004, GK Co-op voluntarily and irrevocably 

surrendered the Securities to Southern States and the Trust 

538 141 UNITED STATES TAX COURT REPORTS (533) 

8GK Co-op sent Southern States and Wachovia Bank, the registrar for 

the series A securities, letters dated June 24, 2004, stating that GK Coop was irrevocably abandoning, relinquishing, and surrendering all of its 

rights, title, and interest to the Securities. The letters requested that 

Southern States and Wachovia take all necessary actions to remove GK 

Co-op’s name and all other references to its ownership of the Securities. 

GK Co-op attached to the letter sent to Southern States the stock certificate for the series B preferred stock and a signed stock power. GK Co-op 

also attached to the letter sent to Wachovia the certificate for the series 

A securities and a signed stock power. By letter dated June 28, 2004, 

Southern States acknowledged its and Wachovia’s receipt of the letters and 

the stock certificates attached thereto. Southern States also agreed to remove GK Co-op’s name from the appropriate securities registers and to 

take all other necessary actions to carry out GK Co-op’s surrender of the 

Securities. 9The parties stipulated into evidence a copy of an opinion letter dated 

July 30, 2004, from the law firm of Alston & Bird, LP, to GK Co-op, setting 

forth its opinion as to the Federal income tax treatment of the loss that 

GK Co-op had incurred when it abandoned the Securities (opinion letter). 

Respondent objects to the opinion letter only with respect to the deficiency 

on the ground of relevancy because respondent has conceded the accuracyrelated penalty. Therefore, respondent’s objection to the opinion letter on 

the ground of relevancy as to the deficiency is sustained because that involves an issue of law. See Fed. R. Evid. 401. In addition, the opinion letter 

acknowledges that there ‘‘can be no assurance that the Service will not 

take a position contrary to our opinion or that a court will not hold contrary to our opinion.’’ 

for no consideration 8 and recorded a $38.8 million loss on its 

GAAP financial statements for the tax year ended June 30, 

2004. After surrendering the Securities, GK Co-op had no 

further ownership interest in Southern States or the Trust. 

The parties have stipulated that immediately before GK Coop surrendered the Securities they were worth at least the 

$20 million Southern States offered to pay for them. 

On its timely filed Form 990–C for the tax year ending 

June 30, 2004, GK Co-op reported a $98.6 million ordinary 

loss deduction under section 165(a) and pursuant to section 

1.165–2(a), Income Tax Regs. 9 In October 2004 GK Co-op 

converted from a cooperative association to a for-profit corporation and merged into GK Inc., and GK Inc. completed an 

initial public offering of its common stock. 

In 2007 petitioner completed its acquisition of all the stock 

of GK Inc., and GK Inc. merged with and into petitioner. On 

December 1, 2008, petitioner and certain of its subsidiaries 

commenced a voluntary case under chapter 11 of title 11 of 

(533) PILIGRIM’S PRIDE CORP. v. COMMISSIONER 539

10 In the petition, petitioner did not allege error with respect to respondent’s adjustments in the notice of deficiency (i) allowing GK Co-op an additional bad debt deduction, (ii) adjusting GK Co-op’s net operating loss, and 

(iii) adjusting GK Co-op’s minimum tax credits from an earlier year. 11 Respondent filed numerous proofs of claim in the bankruptcy case for 

various Federal taxes including, but not limited to, income tax related to 

the deficiency determined in the notice of deficiency. Petitioner timely objected to the proofs of claim in the Bankruptcy Court. Pursuant to the 

order of the Bankruptcy Court entered July 8, 2010, the Bankruptcy Court 

will resolve respondent’s proofs of claim and petitioner’s objection to those 

claims in accordance with the final resolution of the underlying Federal 

tax disputes in this case. 

the U.S. Code (Bankruptcy Code) in the U.S. Bankruptcy 

Court for the Northern District of Texas, Fort Worth Division. See In re Pilgrim’s Pride Corp., No. 08–45664 (Bankr. 

N.D. Tex. filed Dec. 1, 2008). 

On December 21, 2009, respondent issued the statutory 

notice of deficiency to petitioner as successor in interest to 

GK Co-op with respect to GK Co-op’s tax year ending June 

30, 2004. The notice of deficiency determined, inter alia, that 

GK Co-op’s loss on the abandonment of the Securities was a 

capital loss rather than an ordinary loss as claimed by GK 

Co-op on its tax return. 10

When the notice of deficiency was issued, petitioner was 

prohibited by section 362(a)(8) of the Bankruptcy Code from 

filing a petition in the Tax Court to challenge the determined 

deficiency. On December 28, 2009, the debtors’ amended joint 

plan of reorganization under chapter 11 of the Bankruptcy 

Code, as modified, became effective, and petitioner was no 

longer prohibited from filing a petition in the Tax Court. 11

On May 26, 2010, petitioner timely filed a petition in this 

Court, challenging respondent’s determination that GK Coop’s loss on the abandonment of the Securities was a capital 

loss rather than an ordinary loss as claimed by GK Co-op on 

its tax return and the accuracy-related penalty. Respondent 

now concedes the penalty. See supra note 2. 

Discussion 

A. Section 165(a) 

Generally, section 165(a) allows as a deduction any loss 

sustained during the taxable year that is not compensated 

for by insurance or otherwise. A loss from the sale or 

540 141 UNITED STATES TAX COURT REPORTS (533) 

12Sec. 1212(a) establishes rules governing carrybacks and carryovers of 

a corporation’s net capital losses, permitting such losses to offset capital 

gains in certain earlier or later years. 13See also, e.g., secs. 302 (stock redemptions), 1038 (foreclosures), 1234 

(loss attributable to failure to exercise certain options to buy or sell property), 1234B (certain securities future contracts), 1235 (transfers of patents 

other than transfers by gift, inheritance, or devise), 1241 (cancellation of 

lease or distributor’s agreement), 1271 (retirement of debt instruments). 14The parties did not address sec. 1234A in their opening and reply 

briefs. However, because it appeared to the Court that sec. 1234A might 

determine the proper tax treatment in this case, we ordered the parties to 

file supplemental briefs on the issue. On July 2 and 5, 2013, respondent 

and petitioner, respectively, filed second supplemental reply briefs addressing the application of sec. 1234A to the surrender of the Securities. 

exchange of a capital asset is subject to the limitations on 

capital losses under sections 1211 and 1212. 12 Sec. 165(f). In 

the case of a corporation, capital losses from sales or 

exchanges of capital assets are allowed only to the extent of 

capital gains from sales or exchanges of capital assets. Sec. 

1211(a). Although by its terms section 1211 does not apply 

to gain or loss resulting from a disposition that is not a ‘‘sale 

or exchange’’, see, e.g., Helvering v. William Flaccus Oak 

Leather Co., 313 U.S. 247 (1941) (demonstrating that the 

term ‘‘sale or exchange’’ is narrower than the term ‘‘sale or 

other disposition’’), Congress has enacted numerous statutes 

that require capital gain and/or loss in certain situations 

where the dispositions are technically not sales or exchanges, 

including, inter alia, section 165(g), applicable to losses for 

worthless securities, and section 1234A, applicable to certain 

terminations of rights or obligations with respect to property 

that is (or on acquisition would be) a capital asset. 13 If a disposition of a capital asset is not a sale or exchange or 

required by statute to be treated as such, section 1211 does 

not apply and the loss allowable under section 165 is an ordinary loss. See, e.g., Halata v. Commissioner, T.C. Memo. 

2012–351, at *19 (theft loss deducted against ordinary 

income). 

It appeared to the Court that section 1234A might require 

the loss attributable to the abandonment of the Securities to 

be deemed a loss from the sale of a capital asset. We therefore sought the parties’ views on the issue. 14 Respondent 

argues that section 1234A applies, but petitioner argues that 

it does not. We address their arguments herein. 

(533) PILIGRIM’S PRIDE CORP. v. COMMISSIONER 541

B. Section 1234A 

Section 1234A provides: 

SEC. 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). 

The parties agree that the Securities are property and 

were capital assets in the hands of GK Co-op. Shares of stock 

are intangible interests or rights that the owner has in the 

management, profits, and assets of a corporation, while the 

certificate of stock is tangible evidence of the stock ownership 

of the person designated therein and of the rights and liabilities resulting from such ownership. Commissioner v. 

Scatena, 85 F.2d 729, 732 (9th Cir. 1936), aff ’g 32 B.T.A. 675 

(1935); Howbert v. Penrose, 38 F.2d 577, 579 (10th Cir. 1930); 

Storrow v. Tex. Consol. Compress & Mfg. Ass’n, 87 F. 612, 

615 (5th Cir. 1898). Shares of stock ‘‘generally have been recognized as resting in contract, or, technically, as ‘choses in 

action.’ ’’ First Nat’l Bank of Bos. v. Maine, 284 U.S. 312, 

327–328 (1932). Stock, like any other chose in action, is a 

contract susceptible of ownership. See Burnet v. Wells, 289 

U.S. 670, 679 (1933) (finding that a policy of life insurance 

is a contract susceptible of ownership like any other chose in 

action); Estate of Davenport v. Commissioner, 184 F.3d 1176, 

1185 (10th Cir. 1999), aff ’g T.C. Memo. 1997–390. 

The rights set forth in the certificate of the series A securities are similar to the stock rights set forth in the certificate 

of the series B preferred stock. The series A securities, as 

well as the series B preferred stock, were intangible property 

comprising those rights. The value of the Securities was 

attributable to the aggregate value of those intangible rights, 

and the loss from the abandonment of the Securities is the 

result of the termination of those rights. 

542 141 UNITED STATES TAX COURT REPORTS (533) 

Respondent asserts that the surrender of the Securities 

terminated all of petitioner’s rights with respect to those capital assets, and therefore section 1234A requires that the loss 

be treated as a loss from the sale or exchange of capital 

assets. In contrast, petitioner asserts that under section 

1234A a right or obligation with respect to property refers 

only to a contractual or other derivative right to property and 

not property rights inherent in the ownership of the property. Therefore, petitioner contends that section 1234A does 

not apply to the cancellation, lapse, expiration, or termination of GK Co-op’s property rights in the Securities. 

Statutes are to be construed so as to give effect to the plain 

meaning of the words in the text unless we find that a word’s 

plain meaning is inescapably ambiguous. United States v. 

Am. Trucking Ass’ns, 310 U.S. 534, 543–544 (1940); Venture 

Funding, Ltd. v. Commissioner, 110 T.C. 236, 241–242 

(1998), aff ’d without published opinion, 198 F.3d 248 (6th 

Cir. 1999); Rath v. Commissioner, 101 T.C. 196, 200–201 

(1993). Where legislative ‘‘ ‘will has been expressed in reasonably plain terms, that language must ordinarily be regarded 

as conclusive.’ ’’ Negonsott v. Samuels, 507 U.S. 99, 104 

(1993) (quoting Griffin v. Oceanic Contractors, Inc., 458 U.S. 

564, 570 (1982)). We interpret the text with reference to the 

legislative history primarily to learn the purpose of the 

statute and to resolve any ambiguity in the words in the 

text. Landgraf v. USI Film Prods., 511 U.S. 244 (1994); 

Commissioner v. Soliman, 506 U.S. 168, 174 (1993); Trans 

City Life Ins. Co. v. Commissioner, 106 T.C. 274, 299 (1996). 

‘‘Moreover, where a statute is clear on its face, we require 

unequivocal evidence of legislative purpose before construing 

the statute so as to override the plain meaning of the words 

used therein.’’ Rath v. Commissioner, 101 T.C. at 200–201 

(citing Halpern v. Commissioner, 96 T.C. 895, 899 (1991), 

and Huntsberry v. Commissioner, 83 T.C. 742, 747–748 

(1984)). 

1. Plain Meaning 

We look first to the relevant text of section 1234A: ‘‘Gain 

or loss attributable to the cancellation, lapse, expiration, or 

other termination of * * * a right or obligation * * * with 

respect to property which is (or on acquisition would be) a 

(533) PILIGRIM’S PRIDE CORP. v. COMMISSIONER 543

capital asset in the hands of the taxpayer * * * shall be 

treated as gain or loss from the sale of a capital asset.’’ 

Petitioner appears to argue that, under section 1234A, it is 

the right or obligation that must be a capital asset in the 

hands of the taxpayer, and therefore section 1234A does not 

apply because GK Co-op’s inherent rights in the Securities 

were not themselves capital assets in the hands of GK Coop. The flaw with that argument is made obvious by the facts 

that (1) section 1234A applies to gain or loss on the termination of a right or obligation with respect to property that 

would upon acquisition become a capital asset in the hands 

of the taxpayer, and (2) a taxpayer cannot incur gain or loss 

on the termination of a right or obligation that the taxpayer 

has not yet acquired. Thus, it is not the right or obligation 

with respect to property but the property itself that must be 

or on acquisition become a capital asset in the hands of the 

taxpayer. Here, the Securities were capital assets in the 

hands of GK Co-op and the question is whether section 

1234A applies to the termination of the rights with respect 

to those capital assets when they were surrendered. 

Petitioner’s primary position is that the phrase ‘‘right or 

obligation with respect to property’’ means a contractual and 

other derivative right or obligation with respect to property 

and not the inherent property rights and obligations arising 

from the ownership of the property. We disagree. 

Webster’s Third New International Dictionary 1934 (2002) 

defines the prepositional phrase ‘‘with respect to’’ to mean 

‘‘as regards: insofar as concerns: with reference to’’. In its 

everyday usage the phrase ‘‘rights with respect to property’’ 

includes the rights inherent in the ownership of the property, 

including stock. See, e.g., United States v. Craft, 535 U.S. 

274, 282–283 (2002) (stating that the taxpayer’s husband had 

‘‘the following rights with respect to the entireties property: 

the right to use the property, the right to exclude third parties from it, the right to a share of income produced from it, 

the right of survivorship, the right to become a tenant in 

common with equal shares upon divorce, the right to sell the 

property’’); Singleton v. Commissioner, 439 U.S. 940, 940 

(1978) (Blackmun, J., dissenting) (stating that the issue was 

whether a cash distribution that the taxpayer received ‘‘with 

respect to his shares’’ in a corporation was taxable to him as 

a dividend or whether the distribution was an untaxed 

544 141 UNITED STATES TAX COURT REPORTS (533) 

return of capital); United States v. Byrum, 408 U.S. 125, 149 

n.33 (1972) (refers to stock ‘‘with respect to which the right 

to vote was retained’’); Anschutz Co. v. Commissioner, 664 

F.3d 313, 328 (10th Cir. 2011) (stating that agreements 

significantly altered the shareholder’s ‘‘dividend rights with 

respect to the pledged shares’’), aff ’g 135 T.C. 78 (2010); 

Florida v. United States, 285 F.2d 596, 598–599 (8th Cir. 

1960) (referring to an amended court’s order that provided: 

‘‘The receiver appointed herein is hereby vested with all of 

the rights and powers with respect to said stock, including 

voting rights, which could be exercised by the owners of said 

stock at this time[.]’’); Trotz v. Commissioner, 43 T.C. 127, 

132 (1964) (‘‘Petitioner’s rights with respect to the stock 

* * * were so complete that they were tantamount to ownership by petitioner for the purposes of section 1239.’’), rev’d, 

361 F.2d 927, 929 (10th Cir. 1966). 

Most significantly, Congress has used the phrase ‘‘with 

respect to property’’ in other provisions of the Code to include 

rights arising out of the ownership of the property or 

characteristics of the property. See, e.g., secs. 126(e) (‘‘no 

adjustment to basis shall be made with respect to property’’), 

704(c)(1)(A) (‘‘income, gain, loss, and deduction with respect 

to property’’), 772(c)(3)(A) (‘‘an item of income or expense 

* * * with respect to property held for investment’’), 

877A(h)(1)(A) (‘‘the amount of gain recognized with respect to 

property disposed of by the taxpayer’’), 954(i)(4)(A) 

(‘‘unearned premiums and reserves of a qualifying insurance 

company * * * with respect to property, casualty, or health 

insurance contracts’’). Indeed, Congress has used the phrase 

‘‘with respect to stock’’ to refer to rights arising from ownership of the stock. See, e.g., secs. 301(a) (‘‘a distribution of 

property * * * made by a corporation to a shareholder with 

respect to its stock’’), 993(a)(1)(E) (qualified export receipts of 

a corporation include ‘‘dividends * * * with respect to stock 

of a related foreign export corporation’’). 

We hold that the plain meaning of the phrase ‘‘a right or 

obligation * * * with respect to property’’ encompasses the 

property rights inherent in intangible property as well as 

ancillary or derivative contractual rights. 

(533) PILIGRIM’S PRIDE CORP. v. COMMISSIONER 545

15 As originally enacted in the Economic Recovery Tax Act of 1981 

(ERTA), Pub. L. No. 97–34, sec. 507(a), 95 Stat. at 333 (1981), sec. 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.’’ As originally enacted by ERTA sec. 

501, 95 Stat. at 325, sec. 1092(d)(1) defined personal property as ‘‘any personal property (other than stock) of a type which is actively traded’’. In the 

Taxpayer Relief Act of 1997, Pub. L. No. 105–34, sec. 1003(a)(1), 111 Stat. 

at 909–910, Congress broadly extended the application of sec. 1234A by 

substituting ‘‘property’’ for ‘‘personal property (as defined in sec. 

1092(d)(1))’’. 

2. Legislative History 

Petitioner asserts that the legislative history to the 1997 

amendment of section 1234A shows that Congress intended 

that section 1234A apply only to contractual and other 

derivative rights and obligations with respect to property and 

not to the inherent property rights and obligations arising 

from the ownership of the property. We disagree. 

Section 1234A was added by the Economic Recovery Tax 

Act of 1981, Pub. L. No. 97–34, sec. 507, 95 Stat. at 333, 

when Congress adopted a number of provisions dealing with 

offsetting contractual interests in actively traded personal 

property commonly known as straddles. See S. Rept. No. 97– 

144, at 143–154, 170 (1981), 1981–2 C.B. 412, 468–473, 480. 

Congress believed that a change in the sale or exchange rule 

with respect to straddles was ‘‘necessary to prevent taxavoidance transactions designed to create fully deductible 

ordinary losses on certain dispositions of capital assets, 

which if sold at a gain, would produce capital gains.’’ 15 Id. 

at 170, 1981–2 C.B. at 480. 

Congress made relatively minor changes to section 1234A 

in the Technical Corrections Act of 1982, Pub. L. No. 97–448, 

sec. 105(e), 96 Stat. at 2387, and in the Deficit Reduction Act 

of 1984, Pub. L. No. 98–369, sec. 102(e)(4), 98 Stat. at 624, 

and a major change in the Taxpayer Relief Act of 1997 (TRA 

1997), Pub. L. No. 105–34, sec. 1003(a)(1), 111 Stat. at 909– 

910. Before TRA 1997, section 1234A applied only to (1) personal property of a type that is actively traded that is (or 

would be on acquisition) a capital asset in the hands of the 

taxpayer, except for stock that was not part of a straddle or 

546 141 UNITED STATES TAX COURT REPORTS (533) 

of a corporation that was not formed or availed of to take 

positions which offset positions in personal property of its 

shareholders and (2) ‘‘section 1256 contracts’’ that were capital assets. 

The legislative history to TRA 1997 shows that Congress 

believed that the law was deficient because (1) it taxed transactions involving capital assets that were economically 

equivalent to a sale or exchange of a capital asset differently 

from a sale or exchange, (2) it effectively provided some, but 

not all, taxpayers with an election to treat gains from modifications of property rights as capital gains or losses from 

such modifications as ordinary losses, and (3) its lack of certainty made the tax laws unnecessarily difficult to administer. See S. Rept. No. 105–33, at 134–135 (1997), 1997–4 

C.B. (Vol. 2) 1067, 1214–1215. By TRA 1997 Congress 

broadly extended the application of section 1234A beyond 

just straddles and other transactions exploited by tax shelter 

promoters to all types of property that are (or on acquisition 

would be) capital assets in the hands of the taxpayer. 

In describing the then-current law, the Senate Finance 

Committee referred to the considerable amount of litigation 

dealing with whether modifications of legal relationships 

between taxpayers are to be treated as a ‘‘sale or exchange’’. 

Id. at 132–136, 1997–4 C.B. (Vol. 2) at 1213–1216. As an 

example, the committee cited Fairbanks v. United States, 306 

U.S. 436 (1939), where the Supreme Court held that gain 

realized on the redemption of bonds before their maturity 

was not entitled to capital gain treatment because the 

redemption was not a ‘‘sale or exchange’’. The committee also 

pointed to court decisions holding that a disposition that 

occurs as a result of a lapse, cancellation, or abandonment 

produces ordinary income or loss because it is not a sale or 

exchange of a capital asset. The committee gave the following 

examples: Commissioner v. Pittston Co., 252 F.2d 344 (2d 

Cir. 1958) (holding the amount the taxpayer received for cancellation of its exclusive right to purchase a coal company’s 

entire coal output did not constitute a ‘‘sale or exchange’’ 

because the payments were in lieu of profits that would have 

been taxed as ordinary income), rev’g 26 T.C. 967 (1956); 

Commissioner v. Starr Bros., Inc., 204 F.2d 673 (2d Cir. 

1953) (holding payment a retail distributor received from a 

manufacturer for waiver of a contract provision prohibiting 

(533) PILIGRIM’S PRIDE CORP. v. COMMISSIONER 547

the manufacturer from selling to the distributor’s competition 

was not a sale or exchange), rev’g 18 T.C. 149 (1952); Gen. 

Artists Corp. v. Commissioner, 205 F.2d 360 (2d Cir. 1953) 

(holding amounts received by a booking agent for cancellation of a contract to be the exclusive agent of a singer was 

not a sale or exchange), aff ’g 17 T.C. 1517 (1952); Nat’lStandard Co. v. Commissioner, 749 F.2d 369 (6th Cir. 1984) 

(holding a transfer of foreign currency to discharge the taxpayer’s liability was not a ‘‘sale or exchange’’ of that currency, and the loss on transfer was an ordinary loss), aff ’g 

80 T.C. 551 (1983); Stoller v. Commissioner, 994 F.2d 855 

(D.C. Cir. 1993) (holding losses incurred before the enactment of section 1234A on the cancellation of forward contracts to buy and sell short-term Government securities that 

formed a straddle were ordinary because the cancellation of 

the contracts was not a ‘‘sale or exchange’’), aff ’g in part, 

rev’g in part T.C. Memo. 1990–659. 

Petitioner points to those examples and the committee’s 

statement that it ‘‘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 since the value of any asset is the present value of the 

future income that such asset will produce.’’ S. Rept. No. 

105–33, supra at 134, 1997–4 C.B. (Vol. 2) at 1214. Petitioner 

asserts that the examples and statement show that Congress 

intended section 1234A to apply only to contractual and 

other derivative rights and obligations with respect to property and not to the inherent property rights and obligations 

arising from the ownership of the property. To the contrary, 

we do not think that the examples do more than show that 

section 1234A applies broadly to derivative contractual rights 

and obligations as well as inherent property rights. We 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. 

See First Nat’l Bank of Bos., 284 U.S. at 327–328 (‘‘[B]oth 

[stock and bonds] generally have been recognized as resting 

in contract, or, technically, as ‘choses in action.’ ’’). The 

example of a redemption of a bond is most significant given 

that Congress had long since overturned the result in FairVerDate Mar 15 2010 09:52 Feb 03, 2015 Jkt 000000 PO 00000 Frm 00015 Fmt 3857 Sfmt 3857 V:\FILES\BOUNDV~1.WIT\BVACDB~1.141\PILIGR~1 JAMIE
548 141 UNITED STATES TAX COURT REPORTS (533) 

banks by enacting the predecessor of section 1271(a) in the 

Revenue Act of 1934, ch. 277, sec. 117, 48 Stat. at 714–715. 

Moreover, the Senate Finance Committee was critical of 

the existing law because it taxed similar economic transactions differently and effectively provided taxpayers with an 

election to sell the property right if the resulting transaction 

results in a gain or extinguish the property right if the 

resulting transaction results in a loss. The intended effects 

of extending section 1234A to all types of property that are 

capital assets ‘‘would be to remove the effective ability of a 

taxpayer to elect the character of gains and losses from certain transactions’’ and ‘‘to reduce the uncertainty concerning 

the tax treatment of modifications of property rights.’’ S. 

Rept. No. 105–33, supra at 135, 1997–4 C.B. (Vol. 2) at 1215. 

In our view Congress 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 or would be if acquired by the taxpayer, including 

not only derivative contract rights but also property rights 

arising from the ownership of the property. 

3. Amendment of Section 1.165–5, Income Tax Regs. 

Petitioner also argues that the amendment in 2008 to section 1.165–5, Income Tax Regs., generally applicable to securities that become worthless during the taxable year, shows 

that the Department of the Treasury does not interpret section 1234A to apply to property ownership rights. Pursuant 

to section 165(g), if a security that is a capital asset becomes 

worthless during the taxable year, the loss resulting therefrom is treated as a loss from a sale or exchange. The regulation promulgated under section 165(g) clarifies that, if a 

security that becomes worthless during the taxable year is 

not a capital asset, the loss is deductible under section 165 

as an ordinary loss. Sec. 1.165–5(b), Income Tax Regs. The 

regulation, promulgated in 1960, was first amended in 1972 

and remained unchanged until 2008. In 2008 the regulation 

was amended by adding a new paragraph (i) which provides 

that (1) a security that becomes wholly worthless includes a 

security that is abandoned and (2) if the abandoned security 

is a capital asset (and is not a worthless security of certain 

affiliated corporations described in section 165(g)(3)), the 

(533) PILIGRIM’S PRIDE CORP. v. COMMISSIONER 549

resulting loss is treated as a loss from the sale or exchange 

of a capital asset. 

Petitioner argues that, if section 1234A applies to the 

deductibility of a loss on abandonment of property under section 165, there would have been no reason for the Department of the Treasury to have added paragraph (i) to the 

regulation and concludes that ‘‘[t]he only logical conclusion 

that can be reached based on the existence of the Regulation 

and its history is that Treasury did not, and it currently does 

not, believe that Section 1234A applies to the abandonment 

of a security.’’ Petitioner also argues that the regulation creates an exception to section 1234A for securities in affiliated 

corporations. We disagree. 

Under section 165(g)(3) a security in a domestic corporation that is affiliated with the taxpayer is not treated as a 

capital asset. Thus, the regulation does not create an exception to section 1234A; it is the more specific provision of section 165(g)(3) that creates an exception for affiliated corporations. Thus, section 1.165–5(i), Income Tax Regs., gives effect 

to, and is consistent with, section 1234A, as well as section 

165(g)(3). Moreover, the fact that the regulation was not 

issued until 2008 is irrelevant. The Commissioner is not 

required to assert a particular position as soon as the statute 

authorizes such an interpretation. Dickman v. Commissioner, 

465 U.S. 330, 343 (1984); Dresser Indus., Inc. v. United 

States, 238 F.3d 603, 609 (5th Cir. 2001); Yarbro v. Commissioner, 737 F.2d 479, 483 (5th Cir. 1984), aff ’g T.C. Memo. 

1982–675. 

4. Abandonment Losses: Section 1.165–2, Income Tax Regs., 

and Rev. Rul. 93–80, 1993–2 C.B. 239 

On its return GK Co-op claimed an ordinary loss on the 

surrender of the Securities as an abandonment under section 

1.165–2(a), Income Tax Regs. However, the regulation does 

not apply to, and an abandonment loss deduction is not 

allowed for, ‘‘losses sustained upon the sale or exchange of 

property, losses sustained upon the obsolescence or 

worthlessness of depreciable property, casualty losses, or 

losses reflected in inventories required to be taken under section 471.’’ Sec. 1.165–2(b), Income Tax Regs. Consequently, 

GK Co-op’s claimed abandonment loss is disallowed by secVerDate Mar 15 2010 09:52 Feb 03, 2015 Jkt 000000 PO 00000 Frm 00017 Fmt 3857 Sfmt 3857 V:\FILES\BOUNDV~1.WIT\BVACDB~1.141\PILIGR~1 JAMIE
550 141 UNITED STATES TAX COURT REPORTS (533) 

tion 1.165–2(b), Income Tax Regs., because the loss from the 

surrender of the Securities is deemed to be a loss from a sale 

or exchange of a capital asset pursuant to section 1234A. 

Petitioner argues that, if section 1234A applied to the 

deductibility of a loss on abandonment of intangible property 

under section 165 after it was amended in 1997, the Commissioner would have revised Rev. Rul. 93–80, 1993–2 C.B. 239. 

We disagree. 

Rev. Rul. 93–80, supra, addresses the character of a loss 

on the abandonment of a partnership interest when the taxpayer’s share of partnership liabilities is reduced as a result 

of the termination of his ownership in the partnership. In 

situation 1 there was a deemed distribution to the partner 

resulting from the reduction in his share of partnership 

liabilities. The ruling held that the loss on the abandonment 

was a capital loss. In situation 2, the partner was not entitled to include any portion of partnership liabilities in the 

basis of his partnership interest and did not receive any 

actual or deemed distributions when he abandoned his partnership interest. The ruling held that the loss in situation 2 

was an ordinary loss. The ruling holds that a loss incurred 

on the abandonment or worthlessness of a partnership 

interest is an ordinary loss only if sale or exchange treatment 

does not apply. The ruling makes clear that, if a provision of 

the Code requires the transaction to be treated as a sale or 

exchange, such as when there is a deemed distribution 

attributable to the reduction in the partner’s share of partnership liabilities pursuant to section 752(b), the partner’s 

loss is capital. Rev. Rul. 93–80, supra, was issued four years 

before section 1234A was amended in 1997 to apply to all 

property that is (or would be if acquired) a capital asset in 

the hands of the taxpayer. As we previously stated, the 

Commissioner is not required to assert a particular position 

as soon as the statute authorizes such an interpretation, 

whether that position is taken in a regulation or in a revenue 

ruling. Dickman v. Commissioner, 465 U.S. at 343; Dresser 

Indus., Inc., 238 F.3d at 609; Yarbro v. Commissioner, 737 

F.2d at 483. 

(533) PILIGRIM’S PRIDE CORP. v. COMMISSIONER 551

5. Section 1234A Applies to Surrender of Securities 

The surrender of the Securities terminated all of GK Coop’s rights with respect to the Securities which were capital 

assets in the hands of GK Co-op. The loss on the surrender 

of the Securities is attributable to the termination of those 

rights. Accordingly, the loss is treated as a loss from the sale 

of a capital asset pursuant to section 1234A. 

C. Conclusion 

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. 

In reaching our holdings, we have considered the arguments and contentions of the parties not discussed herein, 

and conclude that they are moot, irrelevant, or without 

merit. 

To reflect the foregoing, 

Decision will be entered for respondent 

with respect to the deficiency and for petitioner with respect to the accuracy-related 

penalty. 

f