Document: 50 L.Ed.2d 199 97 S.Ct. 204 429 U.S. 32 UNITED STATES, Petitioner,v.FOSTER LUMBER COMPANY, INC. No. 74-799. Argued Nov. 12, 1975. Reargued Oct. 5, 1976. Decided 2, Syllabus Section 172 of the Internal Revenue Code 1954, as amended, provides that a "net operating loss" experienced by corporate taxpayer in one year may be carried deduction to preceding three years and succeeding five offset taxable income those years. The entire loss must back earliest possible any not "absorbed" first then years, since "(t)he portion such which shall each other excess, if any, amount over sum for prior carried." § 172(b)(2). Proceeding under provision respondent net some $42,000, it had sustained 1968, 1966, ordinary about $7,000 capital gain $167,000. After applying "alternative tax" method 1201(a), permits low gains taxation, maintained after subtracting $42,000 from 1966 income, negative balance $35,000 was still available 1967, taking position its 1968 been only extent income. Respondent accordingly made refund claim Commissioner disallowed but District Court upheld. Appeals affirmed. Held : In carrying both employed alternative tax computation carryover is exceeds taxpayer's "taxable income" plus being well Pp. 36-48. (a) Absent specific excluding income," Code's definitions gross §§ 63(a) 61(a) require included directs before excess can found transfer forward year, Congress intended permit when 1201(a) used, could easily have said so. 36-41. (b) legislative history provisions does support respondent's contention they were designed eliminate all consequences timing loss. 42-46. (c) Had substantially accidents calculation on an average basis would tolerated departure purpose 172(c), cannot particular unless deductions exceed gains. 46-47. 8 Cir., 500 F.2d 1230, reversed. Stuart A. Smith, Washington, D. C., petitioner. Russell W. Baker, Kansas City, Mo., respondent. Mr. Justice STEWART delivered opinion Court. 1 years.1 year; turn respondent, Foster Lumber Co., 1966. question presented whether or instead limited offsetting filed suit Federal challenging Commissioner's disallowance used survived reduce 1967 liability. trial court Eighth Circuit agreed with taxpayer. We granted certiorari resolve conflict recurring statutory interpretation.2 2 * dispute this case centers meaning 172(b)(2) govern carrybacks carryovers successively transferred another. relevant part, requires full possible, provides: "The Thus has applicable, "survives" earlier year. "Taxable defined mean "gross minus allowed chapter." Gross "all whatever source derived," specifically includes "(g)ains derived dealings property." On face concept thus absence gains,3 appears 3 argues prescribed calculating taxes due conflicts natural reading 172. two methods computing corporation duty employ results lower tax. 26 U.S.C. 1201(a). Under 11, "regular method," are added together produce income; during period at issue 22% rate imposed $25,000 remainder taxed 48% rate. prescribes tax," calculated steps applied resulting liability corporation. step computes partial reduced long-term gain4 regular rates 11. This effectively subjects second imposes 25% gain. practical terms, redefine result much effective corporations whose whole substantial part composed It extends long standing policy taxing than applicable 4 problem point view mechanics work way potential benefit fully reflected carried. arises when, method" governs liability, subject less subtracted it. out.5 method, therefore, lost seen simply considering circumstances case. Subtracting $42,203.12 $7,236.05 Step 16 resulted $34,967.07; no $166,634.81 produced $41,658.70. If merely.$7,236.05, exactly the.$7,236.05 however, therefore asserts only.$7,236.05 actually "used" $34,967.07 remained 1967. 5 There doubt ($42,203.12) ($166,634.81) ($7,236.05), leaving $131,667.74 taxed, bill $58,200.52.7 clear despite inability "use" deduction; directly favorable taxation method. "tax benefit" relied carryback maximized independently anticipated provided might occasion subsumed greater 6 explicitly address fit between these benefits, providing contends, Tax Chartier Real Estate Co. v. Commissioner, 52 T.C. 346, aff'd per curiam, 428 474 (CA1), held, phrase "to carried" modifies "each (the) years." further held " 'taxable income' context (as modified above phrase) means actual liability." T.C., 357-358. words, refers produces additional reduction 7 is, course, unusual construction find term's attached clause. But . equivalent deducted, liability" gives phrases synergistic effect goes beyond their import. Such subtly redefines terms impact calculation. implicitly departs "term art" definition given 63(a), while discovering significance word "carry" usual connotation occurred. Standing alone, strained statute's falls considerably short explicit previously required taxpayers seeking losses suffered See, e. g., Woolford Realty Rose, 286 319, 326, 568, 569, 76 L.Ed. 1128.8 allow II broad behind section interpretation 172(b). Although, reasons stated above, hardly claimed fairly within language, inappropriate consider consider, short, "the sought harmony statute organic whole." See Lewyt Corp. 349 237, 240, 75 736, 739, 99 1029. 9 relies Court's Libson Shops, Inc. Koehler, 353 382, 386, 77 990, 992, 924 description allowing carryovers. "were enacted ameliorate unduly drastic strictly annual basis. They set off lean against lush strike something like computed longer year." 10 were, fact, several considerations decision averaging number Ameliorating accounting makes shareholders companies fluctuating opposed stable incomes receive more nearly equal treatment. Without offsets, firm experiencing periods able deduct expenses earning consequence capital, borne who pay higher owners businesses income.9 also through allowance stimulate enterprise investment, particularly new risky ventures where early future prosperous years.10 11 focuses equalizing purposes argue insistence absorption inconsistent 172's primary avoiding subjection similarly situated significantly different treatment solely arbitrary timing. argument based observation that, accepted, ability will deduction. loss, get shortfall absorbed without incremental reduction. 12 may, lavish miserly remedying perceived inequities structure. While there did intend arbitrariness inherent system accounting, vision perfection realization objective.11 13 Over shifted kinds offset, indicating area others make precise later modify them pursuing goals.12 For example, 1924 noncorporate use tax,13 permitting inference drawn aware "waste" otherwise acted prevent That left out 1939 Code, leading contrary decided remedy 14 revision even deduction, (ordinary gains),14 tax-exempt interest offset. same decries here. "used up" "wasting" deduction's capacity overall And utility "wasted" realized until garnered. cut assertion loss-deduction consistently completely minimize consequences, indicate hesitated limit enjoyment though eligible two. 15 1954 continued setoff Although substantive changes commented reports accompanying Code,15 indication addition 172(b) meant signal willingness condition life benefits predecessor statutes' tolerance maximize complete failure Committee Reports shift claims discern revision, requirement finally examination exists today. viewed minimizing approach suspect. not, drafted singleminded devotion reducing urges should control 17 most telling example Congress' "rob" 172(c). defines chapter income." A When negligible rise comes carry another Because forbids setting method,16 loss' arbitrarily "lost" Congress, occasionally past treated differently intent eliminating basis, very inception 18 undercut holding challenged here,17 using permitted, already preferential asks infer deliberate denial accrue preferentially gains, confer rates. manages detail calculations hand other,18 leap firmly grounded articulated achieved congressional discerned 19 argument, boils down "harmony whole" so give greatest taxpayers. we discussed, accepted. judgment Reversed 20 STEVENS, concurring. 21 BLACKMUN advances persuasive arguments apply equally occurs paragraph 209 his seems accept necessity "wooden unimaginative reading" "same year" situation he rejects involving Since language rather plain situations, I think resist temptation attempt creative rewriting Code. perfectly concluding achieve favored BLACKMUN, matter how sensible be. Accordingly, reach advocated dissent, opinion, join, unanswerable. 22 whom THE CHIEF JUSTICE, BRENNAN, POWELL dissenting. 23 What here fiscal 172(a) 172(a), was, Government's term, gain1 gain.2 24 "completely absorbed"3 unavailable (here, 1967) taxpayer; Government deny whatsoever income.4 today agrees. feel conclusion odds obvious policies, defeats provisions, product wooden pertinent sections, dissent. accordingly, policies effectuated, try once again. 25 1. separate Each favors neither Government. separating 1201 1201. By placing ceiling gain, encourages investment formation proved essential Nation's economic development strength. Chief Judge Mehaffy, present case, put way: alter reflect traditionally unique character arising sale assets." 1232 (CA8 1974). 27 provisions: afford relief peaks valleys occasioned our reporting paying annually, encourage venture capital. 28 "Those 993, (1957).5 29 Bulova Watch United States, 365 753, 759, 81 864, 868, 72 (1961); S.Rep. 665, 72d Cong., 1st Sess., (1932); H.R.Rep. 855, 76th (1939); 2319, 81st 2d 59 (1950). 30 position, sets cross purposes. sufficient beneficial current become fatal trap happens subsequent because Government, here, confronts proposition kind, fact Use wholly unintended undesirable undercutting ameliorative meaningless application. supposedly now, largely unpredictable extent, taken away. regret disregard avowed effectuated policies. 31 2. mathematical illogic unfairness analysis. Assuming, must, inequality unknown adverse event ordinarily soften upon B, thereon see Burnet Sanford & Brooks 282 359, 363, 51 150, 151, 383 (1931); 1128 (1932), 'general equitable considerations' do what permissible," States Olympic Radio Television, 232, 236, 733, 1024 (1955); 1029 (1955), remains noted provide leveling influence burden realistic tune Thus, "where whole, withheld taxpayer." Ibid. accomplished, me, deeming "carried" setoff. Despite intimation contrary, ante, p. 43-44, effectuates fairness, perfection. No expects taxation. 3. As applies theory taxpayer, startling. entirety (remaining washing small 1966) larger total 1966-1968 period. true analysis, totally "absorption" imaginary little mystical. 33 serves "income" aggregate so-called "absorption." depends happenstance, later. legislation and, punitive application.6 approach, business exigencies permit, forced time accord estimate unforeseeable answer claim, does, really serve increase struggling realities worlds, ever convinced words coupled administrative fiat, realized. contrast, application consistent judicial decisions, 4, infra, better reality, treat same. 34 4. Decisions favor unbroken line authority Court,7 Courts,8 Courts Appeals,9 Fourth Circuit, persistence divided vote, concluded otherwise.10 Mutual Assurance Soc. 505 128 (1974).11 Where, concerned technical calls highly detailed 172," Brief 6, expertise valuable level accorded deference. comment Jackson, dissenting, Arrowsmith 344 73 71, 74, (1952), concerning competence "steady influence" "a field beset invisible boomerangs."12 accords deference us. 35 reasoning 346 (1969), aff'd, (CA1 1970), cases followed it, accommodates respective provisions. dual year's claiming nevertheless best worlds. Its rejected, properly so, acceptance former precluded latter recognized. 36 effort change statutes order overcome uniform 1974. That, pertinently observed dissent Assurance, F.2d, 138, "is testimonial decisions forth proper statutes." acknowledged oral Service clarifying Congress. Tr. Oral Rearg. 18-20. 37 5. reflects concern achieving structure operates fluctuates. Amelioration appeared law Act 1918. 204(b) Act, 40 Stat. 1061. expanded13 two-year until, 1958 lasting 1976, three-year five-year erected.14 "most companies" enough absorb 1881, 87th 129 (1962). 38 6. accepts critical 172(b)(2)15 clearly unambiguously obviously years," income."16 demonstrated, means, existing among Circuits Court, cited nn. 7, 8, 9, run uniformly unambiguous contended, read many capable judges. now perceives cannot, comport underlying 39 7. 172(c),17 deficit defeat definite kind. definition. concerned, instead, established "carry." definitional restriction 172(c) Nor 172(d)(2)(B) position. 172(d)(2) restricted corporation." Corporate individual frequently structure, assistance, inference, resolving us connection 41 8. "Taxation matter." Harrison Schaffner, 312 579, 582, 61 761, 85 1055 (1941). To ignore wise precept. promotes whenever absent equalize great burdens render goal unattainable introduce irrationalities. 42 affirm Appeals. Title (1964 ed.): "Net "(a) Deduction allowed. (1) (2) subtitle, term 'net deduction' subsection. "(b) amended 317(b), Trade Expansion 1962, Pub.L. 87-794, 889, 210(a) 210(b), 1964, 88-272, 78 47, 48) Net "(1) Years "(A)(i) Except clause (ii) subparagraph (D), ending December 31, 1957, "(ii) respect certification issued 317 "(B) subparagraphs (C) 1955, following "(2) Amount "Except subsections (i) (j), (hereinafter referred 'loss year') (by reason (1)) sentence, "(A) modifications specified subsection (d) paragraphs (1), (4), (6) thereof; determining "(i) regard thereafter, portion, attributable foreign expropriation (1)(D), "and computed, considered zero. paragraph, (1)(D) applies, "(c) defined. "For section, (for 1953) (d). "(d) Modifications. follows: "No Capital corporations. "In 1202 allowed." 420 1003, 95 1443, 43 760. seminal (CA1). 1230. Ninth agreement First Circuits. Foundry 493 1247, Data Products 74-334 (Dec. 27, 1974), cert. pending 74-996. refused follow 128. Sixth agree principle Circuit's reasoning. Axelrod 507 884. tailored sections inadequate 593(b)(2)(E) (mutual savings banks); 832(a) (insurance companies); 852(b)(2) (regulated companies). state certain third sentence 172(b)(2), none suggests instances include simplicity gain" "capital "excess short-term loss." Similarly, sometimes "loss deduction" deduction." 1201(a)(2) 350-356; Weil 424, 229 593 (CA6). text truncated; full: "Alternative Method" (Section 1201(a)) Taxable Income (excluding deduction): Ordinary Gain 166,634.81 $173,870.86 LESS: Operating Loss Resulting From Carryback (42,203.12) --------------- 63(a)) (Step 1—Partial Tax) Excess Long-Term Short-Term ---------------- Balance ($ 34,967.07) Partial Rates 1201(a)(1)) -0- 2—Capital PLUS: Flat Percent Rate 1201(a)(2)) $ 41,658.70 Alternative (Sum Gains (1966 rates) "Regular 11) Regular 58,200.52 (The $1,500 multiple surtax exemption case.) urged finds Treasury Regulations implement CFR 1.172-4, 1.172-5 (1976). generally Department Joint Taxation, Business Offsets (1947), excerpted B. Bittker L. Stone, Gift Taxation 859-863 (1972). (1939): "New enterprises capital-goods industries especially wide fluctuations earnings. believed carry-over greatly aid enterprises." 1337, 83d (1954), U.S.Code Cong. Admin.News pp. 4025, 4052: improve equity comparatively incomes, helpful riskier types encounter marked variations profitability." 1918, gradually lengthened positive offset; perfect view, eschew limitations altogether. 1918 deducted one-year Feb. 24, 1919, 204, 1060. 1933, National Industrial Recovery abolished carrybacks. June 16, 218(a), 48 209. 1939, reintroduced carryover. 29, 122, 53 867. permitted 1958, recently seven elect forgo Reform 806(a), 90 1598. 1924, c. 234, 208(a)(5), 262. Counsel Merrill 122 Ct.Cl. 566, 105 F.Supp. 379, excluded interpreting 12(g) limitation demonstrate construed avoid unnecessary direct general income"; governing deductions, colorable statutory-construction anomalous conclude exclude simultaneously depletion 122(d)(1), (2). (1954); 1622, 31-33 4629; H.R.Conf.Rep. 2543, 5280. 346. express flat unreduced manner. An amicus curiae brief reconsidered grounds concedes supports reached Chartier. normally deducting 50% encompasses strongly similar scope. 424 (CA6 1956); 350-356 1970). parties served erase Appeals, aptly described policy: basic harsh exceptional events confines period." 1232. Raum, my correctly: 'regular' merely tentative, determine smaller tax, measure petitioner's 1962 (the 'alternative' method) $1,115.57 absorbed, remaining $10,342.64 1965. dealing "We exalt form substance contend therefrom computation, into account applied, ultimately 357, 358. 356-358 (Judge Raum); TCM 839, P 73, 177 P-H Memo TC (1973) Quealy); 885, 190 Featherston); Continental Equities, 812, 189 (1974) Tannenwald). Lone Manor Farms, 436 (1974), 510 970 (CA3 1975). 72-1 USTC 9299 (WD Wash.1972); Naegele 73-2 9696 (Minn.1973), appeal docketed, 73-1921 (CA8); 74-2 9759 (CD Cal.1974). 1970); 1247 (CA9 1974); 1230 1974) (case below); 74-3341 (CA9, Dec. pending, Scholarly commentary, uniform. Hawkins, Mechanics Carrying Losses Other Years, W.Res.L.Rev. 241, 250-251 (1963), Herwitz, Planning 844 (1966), pre-Chartier. Compare Note, San Diego L.Rev. 442 (1971), 55 B.U.L.Rev. 134 (1975), May, Deceptive Combination, Lawyer 121 Branda, Some Bizarre Consequences Computation, 455 (1975). last article author concludes: "Chartier progeny reliance soundly reversals unconvincing." Id., 470. Pratt Scolnick, Deduction: Disagreement Among Creates Confusion, Taxes 274 (1975); Nagel, Avoid Wastage NOL Carryovers: Lesson Realty, J. Subsequently, taxpayers, Circuit. 884 (1974). Remarks Stewart Dedication New Courthouse 451, 453 211(b) (adding 1939), 867; 1942, 153(a), 56 847; 1950, 215(a), 64 937; 172(b), 68A 63; Technical Amendments 203(a), 1678. 1598, adds 172(b)(1) (B) 1975, increases Until read: (j) (not here), ." 1901(a)(29)(C)(iv) 1976 1769, replaced "subsections (j)" "subsection (g)." 63. Apparently committee commentary confined modification phrase, surely wrong routine construction. analysis renders modifying useless redundant. (b)(1) directed carried, order, need recite (d)." parenthetical expression eliminated 1901(a)(29)(B) 1769.

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